Some people place their assets in a trust to reduce the inheritance tax liability on their estate when they die. When you establish a trust for money (e.g. to help with growing savings for your kids) or for property (like shares or a house), then if you’ve taken advice and it’s set up properly, those assets are no longer considered to be owned by you, and so they may not count towards your inheritance tax liability when you die.
Trusts are often used in conjunction with financial planning and will planning.
Trusts are legally recognised and protectible structures. Once you have set one up, it is often not possible to dissolve it and/or to take back ownership of what you’ve placed into that trust, except according to conditions established at the time it was created.
So they’re not a step to be taken lightly.
In the context of wills, they’re often used in relation to planning for children, spouses/partners and/or those who may be in care or unable to look after themselves.
A common trust arrangement is for children to only receive ownership of assets once they reach a specified age, or for a family property to be placed in trust for children or others, but a spouse or partner to be allowed to live there for the remainder of their life.
Setting up a trust
You can set up a trust at any time. They’re not just something that happens with will-planning.
You need to ensure that:
what the trust will hold is very clearly identified and capable of being held in trust (you have unconstrained ownership of the assets in the trust). Any paperwork must be accessible and kept up to date
who will be the trustees, and
who will be the beneficiaries
when the trust starts
for how long the trust will endure
what happens when the trust comes to an end
For wills, it's common for people to nominate one or more of their executors to be the true of their will, but there’s no obligation to choose an executor. It could be anyone you choose, provided they’re over 18.
Your executors should all be in the UK. If you want to appoint someone living in another country, you’ll probably need a power of attorney and you should take legal advice.
Who are trustees?
Trustees are people you appoint to run the trust. Like executors, they’re often expert advisers, like bankers, solicitors or accountants, but they can be family members or friends too. Where trusts connected with wills are concerned, often people go for a blend of experts and family/friends.
The trustees are treated as the legal owners of what’s in the trust – in effect, having the same decision-making rights over those assets as the person who originally owned them had. They can therefore treat the property as their own.
However, the rules of the trust are there to ensure that they do not abuse their decision-making powers and that they administer the trust according to the intentions for which it was set up. So they must act lawfully and responsibly.
People who ultimately benefit from what’s held in a trust are called ‘beneficiairies’. They don’t own the assets and they can’t direct what happens to the assets unless and until the trust comes to an end and the assets are transferred into the beneficiary’s ownership and control.
Until then, they have a future right to the assets and potentially a more immediate right to receive something from it, like interest on the cash or a regular payment of money like an allowance.
What are the different types of trust?
There are several different types of trust. These are the main ones you’ll come across – and, some trusts can combine features of more than one:
Bare trusts – these are the most straightforward. They simply transfer ownership of the assets in the trust to the named beneficiary as soon as an event occurs.
Interest in possession trust – the beneficiary gets the income immediately (e.g. rental income from a property that is in the trust), but doesn’t have a right to or any ownership over the actual asset itself. Income tax is payable by the beneficiary in these circumstances. You may see this type of trust often where two people have divorced and one partner wants the children from that previous relationship to benefit from the income, but does not want the former partner to have control of the asset or any right to its income.
Vulnerable person trust – these trusts function very like interest in possession trusts and are set up usually to protect those in a care situation, which could be a child or someone with a disability. There are commonly lower tax obligations on the income for these kinds of trust.
Discretionary trust – trustees can decide how to administer the trust without any constraint on their decision-making powers. Families often use these trusts where assets or property is left to e.g. a child, with the understanding that they will divvy it up as they see fit, between grandchildren and other relatives – or indeed, to invest it and allocate the income from those investments instead.
Not a UK resident trust – this trust covers assets that are held outside the UK. The tax position varies here. Sometimes, no tax will be payable on any income from this trust, because it is already being recovered abroad.
A popular ‘mixed’ trust is where an interest in possession is established for a particular time-frame, e.g. until kids grow up, or a spouse/partner dies, and then a discretionary trust is triggered, so that the trustees have the freedom to decide what to do with the assets after that stage.
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