What is a trust?
A trust is a legally binding way of securing and managing the transfer of assets. This usually means transferring the asset through one of a few different types of trust fund.
A trust ensures that assets are being managed exactly how the original asset holder (the settlor) intended. Trusts are also sometimes used to reduce the value of an estate for the purposes of mitigating Inheritance Tax.
What kind of assets can be put into a trust?
The range of assets that can be transferred into a trust is broad, and may typically include:
- belongings such as cars or antiques
- whole companies or business rights.
Why do people put assets in trusts?
Trusts are set up for a number of reasons. Here are some of the commonest:
- to control and protect family assets
- when someone is too young to handle their affairs
- when someone can't handle their affairs because they're incapacitated
- to pass on assets while you're still alive
- to pass on assets when you die (a 'will trust')
- under the rules of inheritance if someone dies without a will (in England and Wales).
Parties involved in a trust
Donor or 'settlor'
Trusts are usually set up by the settlor who places an initial asset into the trust. Because a trust is founded on a legal contract, it gives responsibility to certain people to take care of the assets.
These are usually a set of people chosen by the settlor which could include the settlor him/her self, family members or friends who manage the trust and are legally responsible for the assets. They must make sure they are working within all the conditions set out in the legal document of the trust known as the trust deeds.
The individuals or charities which will benefit from the assets or eventual outcome of the trust.
See setting up a trust for more details.
The trust deeds, also known as the declaration of trust, is a legally binding document establishing a framework of rules and terms which the trustees must adhere to. It may describe:
- The purpose of the trust, such as who the beneficiaries are
- Who the trustees are and their roles, responsibilities and powers
- The process if they are to be appointed or removed
- The investment approaches of the assets
- Whether the deed can be altered at any point
- The outcome if the settlor is to pass away
How do I set up a trust?
Trusts may either be set up during one's lifetime (inter vivos or living trust) or after someones death as requested in a will (will trust or testamentary trust).
A trust set up at any time in your life is usually set up by having a trust deed drawn up by a solicitor (although technically anyone can draw up a legally binding trust) saying who the trustees are, who the beneficiaries are, how the trust is to be run and what assets you are putting into the trust. You then pass these assets into the trust by giving them to the trustee. A trust that starts when you die needs to be made a part of your will.
Revocable and irrevocable trusts
A revocable trust, also known as a living trust or an inter vivos trust, can be modified at any period during the donor's lifetime. This is in contrast to an irrevocable trust which may come into existence posthumously and cannot be altered.
There are a few other different types of trust, each with subtle differences.
A will trust, also known as a testamentary trust, is the name given to a trust that has been written into a will. It is another way of securing your assets after you pass away. Writing a will trust will guarantee your assets will be distributed exactly how and to whom you wish.
Unlike a living trust or an inter vivos trust, which is set up and comes into being during one's lifetime, a will trust may only start when the settlor or testator passes away. Because a will trust is created after you die, you are not able to amend or revoke it: the will trust becomes irrevocable.
A traditional will may be suitable for you if you have relatively small assets which can be divided up easily. However, it may be beneficial to set up a will trust if you have:
- complex financial situations such as larger assets or estates.
- complex personal situations such a large family, complex situations such as a divorcees or step families, or if there are no obvious beneficiaries.
- beneficiaries who are unable to manage assets for themselves.
- closely held business interests.
Will trusts and married couples
Another use for will trusts is by married couples and civil partners. A will trust is set up in conjunction with splitting up ownership of the family home, so that each partner owns 50%. Instead of leaving their share of the property to each other, they leave it to a trust which comes into being on the death of the first partner. If you have used a will trust in this way and your spouse dies, you have the right to keep living in your home. If you have to move into residential long term care, only the share of the house that you own will be assessed by the local authority for funding eligibility.
Will trusts can also be used to avoid "sideways disinheritance". This occurs when one spouse dies, leaving behind a partner and children, who stand to inherit. If the remaining partner remarries and fails to provide for their children in a new will, there is a risk that everything will go to their new spouse instead of the children. Using a will trust can prevent this, as it is possible to specify exactly who the beneficiaries should be.
Do discuss any type of will trust with your chosen trustees as they are legally responsible for the management of the trust and therefore any tax implications. Different will trusts are susceptible to various taxes and tax exemptions, so it would be good to take financial advice.
Advice on choosing a trust
There are many different types of trust and each holds various benefits depending on your circumstances. To decide on the best trust for you we can put you in touch with a specialist financial adviser.
Get advice on choosing a trust
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Last updated: 01 July 2016