Trusts used to be thought of as something for the rich, a way of passing assets through the generations and avoiding tax. This is no longer the case.
So, what is a trust? A trust is a document which enables one person (known as the Settlor) to transfer assets to another person (known as the Trustee) to look after for the benefit of someone else (known as the Beneficiary).
An example of a simple trust would be where monies are left to a child in a Will but they cannot have the money until they reach the age of 18. During this time the trustees have an obligation to look after the money for the benefit of the child. The trustees would usually be allowed to pass money on to the child's guardian for the benefit of the child whilst at the same time retaining control of the asset.
The Trustees are the people who look after the assets in the Trust. When the trust is in your Will ,then the Trustees are often also your Executors.
Trustees have various obligations which they must meet. Their role is a very important one, not only because you are placing reliance on them to carry out your wishes, but also because of the fiduciary duties which they have. A trustee is under an obligation to ensure that the trusts assets are safeguarded and must ensure that they act with reasonable care at all times. This role is a very important one and you should think carefully about who you entrust this role to.
Trusts are used for a number of reasons, including Asset Protection, Tax Planning, protection in second marriages, as well as providing for children or young beneficiaries. A Trust can be put in place during your lifetime to take effect straight away or can be incorporated into your Will, depending on what your wishes are.
What type of Trusts are there?
There are numerous types of trust available, the most common types being listed below.
Trusts can be very complex documents but can also be essential in order to ensure that the best possible solution is offered to all your concerns.
Professional advice from qualified practitioners will enable your wishes to be met. Our dedicated team are here to explain things in simple terms to ensure that you understand the different options which are available to you.
A Bare Trust is the simplest form of trust.
This is where a beneficiary is entitled to the trust straight away, or they would be if they were 18 years old.
The trustee has no real duty to perform, other than investing the trust assets correctly, and the beneficiary can request that the trust assets are transferred over to them at any time.
When the beneficiary is under 18 the Trustee would usually look after the trust assets until the beneficiary's 18th birthday and then transfer the assets over to them.
The beneficiary is entitled to all of the capital and income and no-one else has any claim on the trust assets.
A right of occupation is a right to occupy a property for a specified period. This right can be for anyone whether they currently live with you or not.
Imagine you have 3 children, 2 of them are in their 30's with their own homes and one is in their 20's still living at home. In these circumstances it may be appropriate to incorporate a right of occupation for your youngest child to say that they can live in the property for a period of 12 months following your death in order to allow them to get themselves sorted. This right of occupation can be subject to certain conditions such as them having to pay all bills, outgoings and insurance.
Many people in second marriages or relationships often find a right of occupation a way of meeting their wishes. Imagine you have a property owned by husband and wife, husband dies leaving everything to wife. Wife can then do what she wants with the property, she can sell, spend all the money, get remarried, leave the property to someone else, the list goes on. This could mean that the husbands children never receive any inheritance. Instead a right of occupation could be set up to state that the wife can live in the house for the rest of her life but when it is sold the husbands share of the property goes to his children.
A Life Interest Trust gives someone an interest in a trust asset for the duration of their life and when that person dies the assets pass on to someone else. The person who has the interest for their lifetime is known as the life tenant. The person who receives the asset after the life tenant dies is known as the remainderman.
For example, a Life Interest Trust gives £20,000 for the lifetime of A, and on A's death to B. This means that whilst ever A is alive he will receive the income which is generated by the £20,000. On A's death the capital which remains passes to B. B will therefore receive £20,000 as there will not have been any growth on the money as A received all interest but the monies have been safeguarded to pass to B. A is not entitled to any of the Capital.
Life Interest Trusts are often incorporated into Wills in order to deal with Asset Protection and to protect your assets when in a second marriage. They can also be used to try and protect assets in case someone goes into a Care Home.
If you have children from a previous relationship it can often be quite difficult to know what the best thing to do is. You wish to provide for your new spouse while at the same time ensuring that your children get what was yours. If your new spouse was to remarry or has children of their own you would probably want to make sure that your assets pass back to your children. A Life Interest Trust can help this happen.
Life Interest Trusts are a fantastic way of safeguarding your assets and passing on any inheritance. However because of the complexities involved it is essential that they are written by a professional as any errors can cause the whole trust to fail.
For most people their most valuable asset is their property so understandably this is the asset most people want to protect.
There are two different ways in which a property can be owned jointly:
Joint Tenants - This is when one party dies and their share automatically passes to the surviving joint owner, irrespective of what their Will states. The surviving joint owner will then own the house in full and can dispose of it however they wish during their lifetime or on their death.
Tenants in Common - This is where each party has their own separate share of the property which they can leave in their Will to whoever they wish, regardless of whether they die first or second.
There can be a number of different reasons for people to have concerns about protecting their assets. The two most common reasons are protection from care fees and protection in second marriages.
Protection from Care Fees
Many people worry about what would happen if they went into a care home and fear that their home and savings would be taken away from them to pay for their care.
At present, if a person enters full time care and they have property, savings & investments worth more than £23,250 then, generally, they will have to pay the cost of their care themselves (figures correct as at 2014/2015).
More often than not when couples make Wills which leave their whole estate to each other on the first death. This means the survivor then owns everything. The problem with this is if the survivor goes into a care home all their assets, including those of the deceased, can be taken into account towards their care fees.
Asset Protection Trust Wills can ensure that your partner can still use and benefit from your assets if you die first, but if the survivor does ever need full time care, your assets will not be used to pay for it.
It is common for a couple to make Wills leaving their estate to each other on their first death and to their children or other family on the second death. However, this may not be suitable for couples who are in a second relationship, particularly if they have children from a previous relationship.
If a couple make Wills leaving their assets to each other on the first death, then the survivor will own all of the combined assets. The problem with this is the survivor is free to change their Will at any time and the first parties chosen beneficiaries could be cut out completely. The survivor could remarry which would mean their Will would automatically be revoked and, again, the chosen beneficiaries of the first to die will lose out.
Asset Protection Trust Wills can ensure that your assets, or share of joint assets, are received by the beneficiaries you choose, regardless of who dies first.
How Asset Protection Trust Wills Work
A Trust is basically a legal arrangement, which in this case is included in your Will.
The Trustees are the people responsible for handling the Trust after your death and, in most cases, are the same people as the Executors you appoint in your Will. The Trustees can include your partner and any beneficiaries you include in your Will. There must be at least two Trustees, preferably three.
There are various types of Trust which can be included in Asset Protection Trust Wills. All of the options can be discussed with you to see what best suits your circumstances.
One of the most popular type of Asset Protection Trust Wills is a Life Interest Trust. This is where the survivor can use the share of their property owned by the first to die for the rest of their life before the share passes on to the next generation. This means that the survivor can continue to occupy the family home for as long as they need to. The advantage of this is that if the survivor ever needs full time care, only their own share of the family home can be assessed towards care fees. The share of the property of the first to die can not be assessed towards care fees as the survivor does not own it, they only have the right to use it.
It is common for a couple to leave their cash, investments and personal possessions to each other outright and for only their property to be subject to an Asset Protection Trust Wills as doing so will have no significant impact on the survivor's day to day life or standard of living.
A life interest Trust for a share of property in Asset Protection Trust Wills is extremely flexible and if they wish to do so, the survivor can decide to move to a new property and use all of the money from the sale of the property to purchase a new property which would be held on exactly the same terms.
Asset Protection is a very specialised area of law and it is essential that you take professional advice to ensure your wishes are met.
The options which best suit your needs will depend on what your assets are, your circumstances, who you wish to benefit and what worries you have.
A Discretionary Trust is one which gives the greatest flexibility as possible to the people running it.
A Discretionary Trust names a number of people as potential beneficiaries but no one person has any definite rights or entitlements.
An example of this would be to say:
“I give my Trustees the sum of Twenty Thousand Pounds to distribute between such of my grandchildren as my Trustees shall in their absolute discretion decide”.
If there were 3 grandchildren, A, B and C then the trustees can do whatever they want - A could have all £30,000 with B and C receiving nothing.
Some people like these trusts as they enable the trustees to take into account an individuals circumstances at the time of distribution and see who actually needs what. As the Trustees have complete discretion nobody can demand their share of the trust. It is common for a letter of wishes to be left with this type of trust to give guidance to the trustees as to what factors they should take into consideration – for example, who is earning good money, has behaved well etc. However this letter of wishes is only a wish and not legally binding.
A Discretionary Trust can be set up during lifetime of in a Will depending on your specific circumstances and what you aim to achieve. However there are very complex rules as to lifetime trusts and there can be tax implications of lifetime trusts so it is essential to ensure professional advice is taken.
A Discretionary Trust can also be a way of safeguarding assets for future generations. You may write your Will at the age of 60 when you have children in their 30's and very young grandchildren. However if you died at the age of 90 then your children in their 60's may be very comfortable and not require the inheritance. Instead your trustees could use their discretion to allow the monies to skip the older generation and pass to the grandchildren and even pass tax free.
Discretionary Trusts can be extremely complex and if written incorrectly can defeat the purpose completely and cause problems.
A Bereaved Minor Trust is a trust created by a parent in their Will. It provides that the monies are held by the Trustees until the children attain the age of majority.
Certain statutory provisions allow the monies to be advanced earlier for the benefit of the minor. Advice should always be sought by the Trustees before doing this to ensure that they are complying with the terms of the Trust.
18-25 Trusts were established in the Finance Act 2006.
They allowed parents to state that on their death their children could inherit their assets at an age between 18 and 25 rather than having to inherit at 18.
Such Trusts can only be created by parents in their Wills.
There are Inheritance Tax implications of such trusts so it is important that professional advice is sought.
A Disabled Persons Trust is a trust which can be created during lifetime or on death.
The aim of this type of trust is to assist disabled persons without prejudicing any rights or benefits that person receives from the government/local authorities.
Sometimes a disabled person may be entitled to benefits which are means tested. This means that if that person was to inherit a sum of money over a certain threshold then those benefits would stop. In the case of a disabled beneficiary these benefits may not necessarily be cash and could be hugely disruptive for the beneficiary to lose.
A Disabled Persons Trust is a very specialised type of trust which can have negative tax implications if not correctly entered into.
A Lifetime trust is a trust which is created by someone to take effect during their lifetime rather than on their death.
Many people set up lifetime trusts in order to effectively deal with tax planning and to reduce their inheritance tax bill on their death.
A Personal Injury Trust can be created when someone has received compensation as a result of a Personal Injury which they suffered.
The idea behind such a trust is to try and preserve any benefits which the injured party may be entitled to that are means tested and that would otherwise be lost if the injured party received all their compensation outright.
If the recipient of the Personal Injury award puts the compensation into a Personal Injury Trust then they are not deemed as owning these monies and therefore their benefits should remain unaffected.
However a Personal Injury Trust is a very specialised type of trust and there are various time limits and procedures to follow in order to set one up.