In their simplest form, trusts allow property to be held by one party for the benefit of another. They've been around since Roman times and, because any kind of property can be held in a trust, they're particularly popular for estate planning, asset protection and taxes.
What are trusts?
A trust is actually a set of instructions, drawn up to make someone or a group of people responsible for looking after your property or money, for the benefit of another group of people. The people who administer the trust are known as trustees and those who’ll benefit from it are known as the beneficiaries. The person who sets up the trust is known as the settlor.
Why would I want to set up a trust?
Lots of reasons, but the most common ones are to reduce the Inheritance Tax liability on your estate, or to make sure that specific people are entitled to receive the income or assets you’d like them to have.
Are they complicated?
They can be. Our recommendation from the outset is that, if you’re thinking about setting up a trust, you should seek professional advice and make sure you understand the implications of anything you’re planning to do. Here, we’ll give you a brief overview of the types of trust available. As you’ll see, there are several types, and each one is designed to achieve something specific:
A ‘bare’ trust or ‘simple’ trust
In a bare or simple trust, the beneficiary gets immediate, absolute right to the assets and/or any income generated from them. The settlor can be sure that the assets will go directly to the beneficiaries they choose but, once set up, those beneficiaries can't be changed.
Discretionary or accumulation trusts
These give the trustees some discretion as to how the income is used. The trustees are the legal owners of the assets, but must run the trust to benefit the beneficiaries. In accumulation trusts, the trustees can accumulate the income until a beneficiary is legally entitled to the assets or the income (these are often used to look after funds and property for a young child).
Interest in possession trust
This entitles the beneficiary to trust income as it’s generated. The trustee must pass all the income received, less any expenses, directly to the beneficiary. If the beneficiary is entitled to the income for life, then he or she is known as a ‘life tenant’.
As it sounds, these are a mixture of things: some of the assets involved may be set aside as an interest in possession trust, others may be treated as though they’re in a discretionary trust (these are often used to look after funds and property for children of different ages).
These are run by trustees who are not UK residents for tax purposes. They’re complex and, in some cases, only some of the trustees will be UK residents. The settlor may not be a UK resident when the trust was set up or when assets were added to it.
Parental trusts for minors
These are trusts for the settlor's minor unmarried children, looking after income as though it belonged to the settlor for tax purposes.
As it sounds, the settlor, or the settlor's spouse or civil partner may also benefit from the trust (these are sometimes used if, for example, a partner knows he or she is likely to be incapacitated by illness, and wants to direct assets for his or her own future income).
Vulnerable beneficiaries trust
These are set up for someone who is physically or mentally disabled, or under the age of 18 whose parent has died. They qualify for special treatment when it comes to capital gains taxes and income (as long as it’s a ‘qualifying trust’ – in which the person who creates it does not receive any benefit from it).
A business trust can be used to make sure that if a partner or shareholder dies the money paid out on their death, usually via a life assurance policy, is paid to the remaining shareholders or partners in a firm. The money can be used to buy back the shares of the company from the deceased’s estate, so that control of the company remains in the hands of the other partners or shareholders.
A cross option agreement is normally used in conjunction with a business trust to give the remaining shareholders or partners the right to buy the deceased’s shares.
Relevant life trust
This is a life insurance policy an employer can use to provide death-in-service benefits for an employee. On the death of the employee, the benefits can be paid to the employee’s family. To minimise any Inheritance Tax liability the policy should be written under a discretionary trust.