Trusts

A trust is created when assets are transferred by a settlor to trustees (who may be individuals or a trust corporation) to hold and look after for the benefit of specified individuals, known as the beneficiaries.

There are different types of trusts. Three main types of trusts are:

• bare trusts – commonly used to hold assets for minors until they turn 18 years old. The assets belong to the beneficiary and a beneficiary who is an adult with mental capacity can end the trust at any time by demanding the assets be transferred to them. These types of trust are more commonly created by Will.
• interest in possession trusts – the beneficiary with the ‘interest in possession’ receives all income from the trust. The capital value of the assets are kept intact and will pass to another beneficiary (or beneficiaries) when the interest of the initial beneficiary ends. Again, these are more commonly found in Wills and we can offer advice as to their inclusion in your Will as they can help to protect assets for multiple beneficiaries.
• discretionary trusts – here the trust specifies a class of beneficiaries and the trustees choose who to distribute income and or capital to and when. The trustees may be guided by a non-binding letter of wishes from the settlor, but they must exercise their own discretion. These type of trusts can be included within a Will or created in your lifetime, to offer flexible management of gifts and provide for more vulnerable beneficiaries and asset protection.

You can choose to hold jointly held property with a spouse as ‘tenants in common’, this removes any rule of survivorship between you and the other joint owner, your share in the property can then be gifted in a Will however you wish. One such way is to make specific provision to place that share into an interest in possession trust, for the life of the spouse and then to anyone of your choosing, normally children and/or grandchildren.

This trust will specify how this share is to be managed by the trustees for the benefit of your surviving spouse (the beneficiary) during their life and that upon their death to who has been specified in the Will. This is particularly helpful for those considering the needs of children from a first marriage whilst making provision for a new spouse and also to those who simply wish to take steps to protect an asset, by making sure the surviving spouse doesn’t end up owning the whole of the estate outright.
Please speak to one of our team of Wills and probate solicitors who will be more than happy to provide you with the assistance and advice you need.

A discretionary trust is very flexible and it has many uses. A discretionary trust may be used when a beneficiary is irresponsible with money, or where the settlor is concerned about bankruptcy or divorce, in order to safeguard the assets. It may also be used where a settlor simply does not know which of a large class of beneficiaries may be in most need of support in the future.

By creating a discretionary trust now in your lifetime, you will avoid the need for probate in respect of the assets transferred into the trust during your lifetime.  However ultimate responsibility as to who benefits and when, will be in the hands of the Trustees, they can be reactive to changing circumstances of the beneficiaries, but this could also mean that they do not benefit at all.

There can be tax advantages to creating a lifetime discretionary trust which include:

• by transferring assets out of your estate now you will reduce the value of your estate when you die, which may save inheritance tax
• where inheritance tax is payable on creation, it is at the lifetime rate of 20%, but this only applies above a certain threshold
• inheritance tax is not applicable where business property relief and agricultural property relief apply
• if you have assets that are likely to increase in value then you can put them outside of your ownership now, instead of retaining them and incurring a large inheritance tax liability when you die

However, it is advisable to take specific tax advice as there will be HMRC registration requirements and ongoing tax liabilities depending upon the type of asset held within the trust and consideration of Trustee tax rates.

Our specialist legal advisers can help you to create a discretionary trust. You will need to consider, who you wish to benefit, who should act as Trustees, what assets are to be transferred into trust (bearing in mind that once the asset has been transferred you have lost the right to change your mind at a later date), what advice you would give to your trustees on how you wish for them to act.

Specific tax advice should also be sought, as there are further considerations such as a ten-year anniversary charge and HMRC trust registration requirements to consider. Following which your legal adviser can draw up the trust deed for you and the trustees to sign and your adviser can talk you through this process.

The trustees will then be responsible for its administration and for making decisions about distributions to the beneficiaries.

The trustees will have regular, e.g. annual or bi-annual, trustee meetings to make decisions and review investments. Most trustees will engage investment advisers to manage share portfolios or letting agents to manage property.

The trustees must ensure that they meet all their legal and compliance obligations, which could also include completion of tax returns and updates to the Trust Registration Service.

Your specialist private client advisor will be able to give you advice tailored to the circumstances of your case.