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:
- Trusts to enable clients to give assets away but yet still retain control.
- Peace of mind if you wish to provide for a vulnerable beneficiary who is disabled either mentally or physically.
- Trusts to benefit a spouse or civil partner and to cover a wider class of beneficiaries including children, grandchildren and further down the family line.
- Trusts 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, 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.
In this section we provide information on the following:
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.
Declarations of Trust
Declarations of Trust are very useful documents when two or more people buy property jointly together.
The Declaration of Trust will set out each owner’s share in the property. It also sets out the rights and obligations of each owner in relation to the property, for example, relating to payment of outgoings and mortgage contributions. The document details what should happen if one owner wishes to “walk away” from the property. In those circumstances, the opportunity is given to the remaining owner to buy out the share of the owner who wishes to leave. If a buy out does not happen then the property is placed on the open market. The Declaration of Trust can detail how the property’s open market value should be determined in the event of any disagreement. The proceeds of sale of the property would then be distributed to the owners in the shares as recorded in the Declaration of Trust.
There are two different ways in which property can be owned when purchased jointly; either as ‘joint tenants’ or ‘tenants in common’. Both mean that the property is owned jointly but the way it is viewed in law is very different.
If you own a property as joint tenants, then you each own the whole of the property together. If one of the owners were to pass away, the property would continue in the name of the surviving owner or owners. This happens regardless of the terms of the will.
Tenants in Common
If you own a property as tenants in common, you each own your own distinct shares in the property. This allows you to divide up the property into shares, which can be 50/50, 60/40, or whichever proportions you agree between you. Your respective shares in the property will pass in accordance with the terms of your wills. If you decide to own a property as tenants in common it is therefore extremely important that you consider putting a will in place.
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.
Interest in possession trust
Such a trust allows 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.
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.
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