3 generation family

Trusts – What are they and do I need one?

Trusts are often perceived as complicated, surrounded by baffling terminology, expensive and only necessary for the super-rich, but as Solicitor Lucy Wilton explains, this is not necessarily the case and many of us may even have one without realising it!

What is a Trust?
Most of us have heard of Trusts, but may not have a clear understanding of exactly what they are used for, or when it might be beneficial to consider setting one up. They are often thought of as the preserve of the super wealthy, but this is actually not true. The other common misconception is that Trusts are always complex or expensive to run. An everyday example of a simple Trust arrangement is co-ownership of a house with another.

Simply put, a Trust is a legal vehicle to hold assets. They can also be a way to maintain control of your assets and guard against changing circumstances.  There are a number of different types of Trust, and they are all taxed differently. As with most legal drafting, one size does not fit all and it is crucial to take advice on the type of Trust most suitable to your specific situation, before making a decision.

Assets within a Trust are held and managed by one person or people ‘the Trustee(s)’ to benefit another person or people ‘the Beneficiary’. The person providing the assets is called ‘the Settlor’. Various types of assets can be put in Trust such as, property, land, cash, and investments such as shares. Trustees then have certain powers to maintain and grow those assets, for the ultimate benefit of the beneficiaries. You could think of Trustees are care takers of the Trust fund, protecting the assets for those entitled to them. Trustees can have straightforward powers, or be able to exercise discretion and so taking advice on who to appoint is very important. You do not want to pass your valued assets into a Trust, only for them to squandered or misused by a rogue Trustee!

Trusts are sometimes viewed with suspicion, but as above many of us already have one within our existing Will or via property we own. A Trust can be created either in a Will, or during your lifetime. If it is in a Will, it will only become operative once administration of the Estate is finalised. If it is in a lifetime document, it can take effect immediately. It is sensible to undertake lifetime planning and death planning holistically to ensure that the two do not conflict.

What is the difference between a Will and a Trust?
There are two clear differences between Wills and Trusts.  Wills are about distribution of assets, but Trusts are concerned with control of those assets e.g., how and when they are distributed to your chosen beneficiaries.   The other major difference between Wills and Trusts is that Wills only become applicable after your death, whereas a Trust is a way to control your assets for your beneficiaries either during your lifetime or after you die. Wills can contain Trusts if required, and those Trusts need never be formally created if it is more appropriate to make outright distributions at death, rather than use the holding pen of the Trust.

Do I Need a Trust if I Have a Will?
Even if you already have a Will, it could be advantageous to set up a Trust if you want additional control over particular aspects or scenarios. Specific conditions can be written into a Trust and a Trust also enables you to maintain privacy amongst beneficiaries.  There may also be tax advantages in a Trust and a Trust has the potential to keep assets safe from creditors or from inclusion in means tested benefits such as care home fees. As above, Wills can contain Trusts and these are often overlooked in favour of the standard Fixed Wills. A Will containing a Trust can be just as simple as a Fixed Will, but it would afford your chosen Executors/ Trustees with flexibility when dealing with your Estate upon death, that a Fixed Will cannot achieve. We describe Wills containing Trusts as ‘Flexible Wills’, and can advise whether this is suitable for your own circumstances and what sort of Trust should be involved.

When is a Trust appropriate to consider?
There are various situations where it can be appropriate to set up a Trust.  As mentioned earlier, complex families can be an example of this but there are many others, including where beneficiaries are classified as minors or vulnerable, so unable to look after their own affairs. Trusts can also be used to protect assets from being included in divorce settlements and bankruptcy proceedings, enabling the Settlor to be sure that their wishes are followed despite changing circumstances over time.  Here are a few examples of such situations:

  • Complex families
    Complex families where there are children from a previous relationship.  You may wish to ensure that your current partner or spouse can remain in your property until they die when the property would then be left to your children. This can avoid a potential scenario, sometimes referred to as ‘Sideways Disinheritance’, where your spouse remarries after your death and then makes another Will, leaving the inheritance you intended for your own children to the children of their new partner. The type of Trust used in this situation is a Life Interest Trust.
  • Beneficiaries who are U18
    When beneficiaries are too young to manage their own affairs, a Trust can be set up so that the ‘Trustees’ manage the asset until they reach an age specified in the Trust. ‘Bare Trusts’ are often used for this purpose.  Assets in a Bare Trust are held in the name of a Trustee or Trustees, who look after them until the beneficiary is old enough.  However, the beneficiary has the right to all of the capital and income of the Trust at any time if they are 10 or over. This means that the assets set aside by the Settlor will always go directly to the beneficiary, who can have certain powers to call on their share of the Trust. This arrangement can also be useful for beneficiaries who are not minors, but if you have concerns that a potential beneficiary might be prone to spend their inheritance all at once or that the inheritance needs protecting for a better day.  A Discretionary Trust can be set up in this instance, and that beneficiary could receive smaller sums on a regular basis or you could state an alternative set up that you feel would suit that particular situation. The Trustees then have discretion to carry out your wishes with a view to protecting your assets.  
  • To protect assets from Care home fees
    A Life Interest Trust might be used to protect a family home for future generations rather than having to be sold to pay for care home fees.  If your share of a jointly owned property is given to your co-owner in Trust (rather than outright) and they subsequently need care, it would only be their share of the property that is relevant for means testing, rather than the property as a whole. Your own share can then be redirected to other beneficiaries, which also prevents your share being lumped with the person in need of care.
  • Inheritance Tax Planning
    Assets placed into a Trust can also no longer be considered the property of the Settlor for tax purposes. Usually, after a period of seven years, provided the Settlor does not have any ongoing interest in the Trust, these assets will no longer be factored into the value of the Settlor’s Estate for inheritance tax upon death.  
  • For disabled or incapacitated beneficiaries
    Where someone is disabled or incapacitated and therefore unable to manage their own affairs, a Trust enables appointed Trustees to manage the assets on their behalf. A Discretionary Trust is generally used for this purpose, although there are other types of Trust specific to disabled persons, which have preferential treatment provided the beneficiary of the Trust is qualifying under the relevant legislation.

Tax implications
None of us like paying more tax than is necessary, but it is important to be cautious when setting up Trusts to ensure that tax implications are carefully considered prior to making a decision. There can be entry, 10 yearly and exit taxation charges on some Trusts and other capital taxes can be triggered. The main taxes that require attention are inheritance tax, capital gains tax, income tax and stamp duty land tax, but others may be relevant depending on the scenario. It is therefore always important to seek advice before setting up a Trust, as tax implications can be substantial and can sometimes be mitigated or avoided if planned for in advance.

With a Will, Executors of the Estate cannot access your assets until any Inheritance Tax and probate fees have been paid.  This can take several months.  With a lifetime Trust, your Trustees can immediately access the assets because they are held in Trust, and are therefore not part of your Estate. Some people set up a lifetime Trust as a slush fund for Executors of a Will to utilise whilst Probate is being dealt with on assets that remain under the provisions of a Will (as opposed to the lifetime Trust).

Costs of setting up and maintaining a Trust
The average Trust costs between £1,000 and £2,000 to set up depending on the advice required beforehand and the complexity of the Trust’s functions.  There can be costs associated with maintaining it which depend on factors such as the number of beneficiaries, the complexity of the asset(s) in question and the amount of distributions required. Most Trusts require an annual review with the Trustees, lawyer and financial advisor and then other work is charged for as it arises.

Can a Trust be revoked if I change my mind?
It is possible for a Trust to be made revocable, but this generally has negative consequences in respect of tax, asset protection and stamp duty. If this aspect is something which you are concerned about it should be discussed when considering the terms of the Trust and you can therefore receive advice on your options to end the arrangement, before it is entered into.

In summary
The plethora of different types of Trust can make them a rather daunting a complicated prospect, but they do have a simple concept behind them of enabling the person who establishes the Trust, the ‘Settlor’, to ensure that their assets are passed on according to their wishes and to protect against an uncertain future.  We have only given examples of some types of Trust in this article, there are others too which can be considered if appropriate to your situation. The important point is to get professional advice before making a decision. Often articles on the internet give general broad brush advice which may not be suitable once your own individual situation is considered.

Get in touch
If you would like to find out whether a Trust might be beneficial to you, our friendly and experienced Wills, Trusts, and Probate team would be pleased to hear from you.  You can call us on 01872 241408 or email info@penderlaw.co.uk