Introduction to Trusts

A Trust arrangement can be invaluable in some unusual or complex family situations. Below are examples of situations where the creation of a trust can be particularly beneficial:

• peace of mind if you wish to provide for a vulnerable beneficiary who is disabled either mentally or physically
• to benefit a spouse or civil partner and to cover a wider class of beneficiaries including children, grandchildren and further down the family line
• as a tax planning strategy

The person setting up the Trust is known as the Settlor. If a Trust is contained in the Will of a Settlor, the Will itself will include the powers for the Trust, it will also identify the class of beneficiaries and the Trust assets. If the Trust is contained in the Will the Trust will only arise on the death of the Settlor.

Some people prefer to set up a Trust in their lifetime by either setting up the Trust and the Trust is effective immediately or by creating a pilot Trust which is established with a nominal sum (typically £10) with the intention that substantial assets will be added in the future. However care needs to be taken to ensure that the Settlor does not retain an interest in the Trust as a beneficiary and neither should their spouse/civil partner or minor unmarried children or step children. Whether the Trust is set up as a pilot Trust or as an immediately effective Trust, the Trust Deed should ensure that the parties are not entitled to an interest in the Trust as otherwise there are adverse tax implications to the Settlor particularly in respect of income tax and capital gains tax.

There are four broad types of Trust as follows:

1. BARE TRUST

In this type of Trust the Trustees act as a nominee and hold the Trust assets for the beneficiary. The rules require the Trustees to pass the Trust assets to a child when they reach 18 years old. This may or may not be appropriate depending on the maturity or otherwise of the beneficiary. The Trustees have no power to postpone passing over the assets. However before a child reaches 18 the funds in the Trust can be used for their maintenance and benefit.

2. DISCRETIONARY TRUST

This type of Trust is very flexible in the approach towards the beneficiaries as there will be a class of beneficiaries but no one beneficiary has an absolute right (contrast the case of a Bare Trust above) rather, the Trustees retain absolute discretion and can deal with the Trust assets as they see fit subject to the powers provided in the Trust Deed and the powers provided by statute. This may mean that funds are not provided to an individual beneficiary because there are concerns that the money could be used unwisely. Sometimes one beneficiary may benefit more than another as the Trustees can weigh up the needs of all the beneficiaries in the class and act in a way which can suit the circumstances. Often Discretionary Trusts will last for a long time, the maximum is 125 years for Trusts created after 5 April 2010. The Trustees do need to act fairly and therefore it is important that the Settlor chooses his or her Trustees carefully at the outset and that the Trustees are advised of your wishes at the outset. However it should be remembered that the Trustees retain the power to make decisions and are only guided by a letter of wishes prepared by the Settlor.

3. INTEREST IN POSSESSION TRUST

Such a Trust allow a beneficiary known as the ‘life tenant’ to enjoy a right to income or to enjoy the occupation of a property which belongs to the Trust during their lifetime. It is an absolute right during their lifetime but the life tenant does not own the property outright. Some Interest in Possession Trusts do contain powers to advance capital to the life tenant but this is a special discretionary power exercised by the Trustees. After the period set for the life tenant ends, the Trust assets will pass to the remaindermen who will take the Trust assets outright.

4. TRUSTS FOR DISABLED OR VULNERABLE PERSONS

These Trusts can provide for a vulnerable or disabled person and still enable them to maintain their means tested benefits. The rules relating to the Trust are very specific and we can provide advice to you according to your needs on an individual basis.

TRUSTEES

The Trustees are the people who are appointed to manage the Trust and its assets. Care must be taken at the outset to find suitable Trustees to act, it is a position of extreme responsibility and one which brings with it a duty to observe the terms of the Trust, to act impartially when reaching decisions concerning the beneficiaries, to manage the Trust funds and to review them regularly, to act in unison with their Co-Trustees and not to profit from the Trust. There are other duties and responsibilities which will need to be assumed by Trustees, we can provide a fact sheet which sets out the powers and duties of a Trustee, they range from the powers in the Trust Deed itself which will be individually drawn up for the Trust and those powers contained in statute. A Settlor can act as a Trustee.
 

TAX ISSUES

The taxation of Trusts is an area which can be complicated. The creation of the Trust creates a new tax entity which can potentially attract income tax, inheritance tax (when the Trust is set up, if the Trust is over the nil rate band, currently £325,000, IHT during the lifetime of the Trust and when the Trust ends) and capital gains tax.

The tax regime differs within the different types of Trusts and the Trustees need to keep up to date with developments in the taxation of Trusts. In Discretionary Trusts, the Trustees should consider payments of income to beneficiaries who are non-tax payers or lower rate tax payers as the beneficiaries may reclaim the difference between their rate of tax and the tax paid at the top rate of 50% by the Trustees. There are special rules where the tax income consists of dividend income as the Trustees can find themselves in the situation where they have made an overpayment from dividends to the beneficiaries and not retained sufficient tax if they have distributed the whole of the dividend income received. It is for this reason that careful records need to be kept of all income received and consideration needs to be given to the tax consequences of distributions made to beneficiaries.

All Trusts, whatever type they are, need to be reviewed regularly. We provide a service which covers the setting up of the Trust through to the bringing the Trust to an end and covers all aspects in relation to the ongoing administration of the Trust together with the preparation of the Trust tax returns as required.