What is a Trust and is it right for you?

What is a trust?

A trust is a legal vehicle where you can transfer the legal ownership of your valued assets - maybe cash, property or stocks - and have some control on how assets are distributed to a loved one or ‘beneficiary’. The person who creates a trust is known as the ‘grantor’, and you tend to have ‘trustees’ to manage the running of the trust day to day.

Why set-up a trust?

As a legal structure, people use trusts for lots of different reasons, for example:

To maintain control of your assets and provide some security for both the grantor and the beneficiaries, giving peace of mind to both parties
Trusts are sometimes set-up if you want to gift an asset to a minor who may not currently be savvy yet to accept the asset or require expert help on managing the asset; again it provides comfort and control to the grantor that their asset is distributed in the manner they want
If you have complicated personal relationships, for example, children from more than one marriage, a dependent parent or relative, or offspring whose financial resources vary greatly — leaving clearly explained directions for distributing your assets might prevent potential disputes
Trusts are set-up also to help minimise your inheritance tax liability

None of us know when we will die, and although we can write a will detailing who receives our assets upon our death, a trust allows you to maintain control of your assets whilst still alive and of sound mind, or indeed ensures that your assets are distributed as per your wishes if you are not medically fit to do so alive or after your death.

Ask yourself these 3 questions: Is a trust right for me?

Why do you need it?
What benefits will it achieve?
How much money is at stake that makes it worthwhile?

Trusts are costly and time consuming structures that might not be right for you, and likewise unwinding a trust is a lengthy and complex process.

Trust Complementary Consultation

What types of trusts are there?

You can have either a ‘revocable’ or ‘irrevocable’ trust and they can come into force whilst you are still alive or after your death.

Revocable trusts can be changed or revoked at any time. From a tax perspective, any assets held in a revocable trust may not be shielded from inheritance tax after the grantor’s death, and if the asset in the trust generates income, such as a rental property or indeed dividends from shares, the grantor must also pay tax on the revenue.

Irrevocable trusts cannot be changed by the grantor once the trust has been executed or put in place. The assets placed into a correctly drafted irrevocable trust are generally removed from a grantor's estate for tax purposes, so may not be liable for inheritance tax upon the grantor’s death. Likewise, income and capital gains taxes incurred by the assets within the trust may be paid by the grantor or by the trust and/or the beneficiaries.

Most revocable trusts become irrevocable at the death or disability of the grantor.

Inheritance related trusts?

Bare trusts - A simple trust where your child or children inherits money at 18 and the taxes are borne by your children, not yourself, and subject to their personal allowance.
18 to 25 trusts - These trusts have some tax saving implications. Exit charge of up to 6% levied on money in the trust over and above £325,000.
Discretionary trusts - A more complicated trust and used for various reasons, such as allow the person or people managing the trust to choose who can benefit from the trust and how much money beneficiaries will receive. Family trusts is an example of a discretionary trust that hold a family's assets or run a family business. There are running costs and 10-year anniversary charges of up to 6% of the value above £325,000.
Vulnerable beneficiaries trusts - These are not subject to the same tax regime, but only if the beneficiary is proven to qualify as vulnerable.
Life interest trusts: These are often used by couples so that if one dies their half of a property or their assets is passed to children and doesn't fall into the hands of a future spouse and their offspring.

How much control do I have setting up a trust?

Depending on the type of trust you set-up, the grantor can retain the right to make some or all of the decision regarding the trust. The grantor usually names a trustee to handle the investments and manage the trust’s assets day to day.

A trustee may be an individual such as a solicitor or accountant, or a trustee can be hired who is an expert in estate planning and taxation. Trustees have ‘fiduciary’ responsibility, which means they must act on the best interest of the beneficiaries, not necessarily the grantor, whose wishes will ultimately be set out from the start of the trust set-up.