A Trust is created when assets are transferred from one person (the settlor) to another person, people or company (the trustees) to hold for the benefit of another person or people (the beneficiaries). The trustees of a Trust are under a legal duty to manage and control the assets held within them and to act in the best interest of the beneficiaries.
A Trust can be set up during lifetime or set up in a Will to take effect on death.
Life Interest Trusts
A beneficiary under a Life Interest Trust will have the right to all (or part) of the income generated by the assets held in the Trust during his or her lifetime (or for shorter fixed period). The trustees may also have the authority to pay all (or part) of the capital to the beneficiary. The terms of the Trust will direct what is to happen to the capital assets when the beneficiary's life interest comes to an end.
A Discretionary Trust will name potential beneficiaries or describe a class of potential beneficiaries. It will then be up to the Trustees to decide how to divide the income and capital between the beneficiaries. It is usual for the settlor to prepare a "letter of wishes" to sit alongside the Trust setting out how they would like the assets to be divided between the beneficiaries. Any such guidance is not legally binding but the trustees should follow this guidance unless there is good reason to depart from it. The terms of the Trust will specify what is to happen in the unlikely event that the trustees fail to make a decision or there are assets remaining in the Trust at the end of the Trust period.
A Bare Trust is a “nomineeship”. The Trustees hold assets as nominees for the beneficiary. The trustees have no powers over the distribution of the assets but rather must deal with the assets as directed by the beneficiary. It is common to put in place a Bare Trust for a minor Beneficiary so that the trustees can control and manage the assets until the beneficiary reaches the age of 18, at which point the beneficiary can direct the trustees to transfer the assets to them directly.
A Trust can offer a layer of protection for the assets held within in it if the beneficiary were, for example, to go through a divorce or face bankruptcy. An outright gift to someone in such a situation could result in the gifted assets passing out of that person's control, to a former spouse or to a trustee in bankruptcy.
Trusts are subject to tax in their own right but they can also be useful for tax planning purposes. A transfer of assets to a Trust during lifetime can reduce the inheritance tax payable on the Settlor's death by reducing the value of his or her chargeable estate. The transfer of assets to a Trust for a beneficiary with a low level of income and gains can result in lower rates of income and capital gains tax.
A Trust may be appropriate where the beneficiary is a vulnerable person (i.e. a minor or a person who lacks mental capacity) as the assets would be available to support the vulnerable individual but the trustees will be there to manage and protect the assets.
Whether a Trust is right and what type of trust is most suitable will depend on the individual circumstances. Financial and legal advice should be taken before setting up a Trust.