A trust is created when assets are transferred to a person or persons (called trustees) to hold those assets on behalf of another person or group of people (called beneficiaries).
Trusts have many different uses, for example, taxation and the protection of assets. A trust created during your lifetime is usually known as a settlement and the person creating the settlement is called the settlor. A trust created on death will simply be called a will trust. The word trust is used to refer to will trusts and settlements. A trust is usually created in writing – either by a formal trust deed or under a will.
There are 3 main types of trust:-
The trust may provide for the children to inherit at an age above 18 – for example 21 or 25. The trustees will then hold the trust assets until this condition is fulfilled. Unfortunately, Inheritance Tax will be charged on the trust assets from the time the beneficiaries are 18 up until they inherit.
• Interest in Possession Trusts – created when you want someone to benefit from the trust during their lifetime – e.g. the right to live in a property or receive the income from investments – but on their death, for the assets pass to other beneficiaries.
Please see our recent article on the changes to inheritance tax on our articles page for more information.
Some examples of reasons for creating a trust are:-
• Concerns over the payment of Inheritance Tax by your beneficiaries.
Solution: create a discretionary trust which will enable your spouse/civil partner to be a beneficiary of the trust but the assets in the trust will not be added to their estate when they die, enabling both spouses/civil partners to use their nil rate bands (currently £312,000)
• Concerns over your assets being taken over or managed by authorities such as the government or social services when you have a genuine need for them to be used by your family.
Solution: Transfer assets into a lifetime trust so that your trustees will manage your assets, rather than the authorities, but you can still benefit from them during your lifetime.
• Concerns over money being paid to minor children when they are too young.
Solution: Create a trust to hold the assets until the children are older and more experienced.
• Concerns over leaving money to your children and effects of their divorce and bankruptcy
Solution: Create a trust so that the trustees have the discretion over who should benefit and when, depending on their individual circumstances.
• Concerns over taxation of trusts when you want to create a trust for a disabled child (although not necessarily a minor).
Solution: Create a special disabled persons trust which will benefit from favourable Inheritance Tax treatment whilst providing for the disabled child without affecting their entitlement to state benefits.
The law of trusts is complex and technical, particularly when you also consider the effects of Inheritance Tax. However, provided your trust and/or tax planning is considered early and with proper advice, you can ensure that you have arranged your financial affairs to the best of your ability for the benefit of your family.
At Ridings Law, we can assist with setting up the trust/settlement, the ongoing administration of the trust and winding up, or ending, the trust. We can also advise you regarding any tax implications – either in setting up the trust or during the ongoing administration. Linda Pratt is a member of STEP – the Society of Trust and Estate Practitioners - and lectures nationally on trusts and taxation.
To discuss trusts in more depth, please contact Karen Law on 01943 885103 or email karen.goor@ridingslaw.com.