Trusts

A trust is a legal arrangement where one person (the settlor) transfers assets to another person or entity (the trustee) to be held and managed for the benefit of a third party (the beneficiary). Trusts can be used for a variety of purposes, including protecting assets, managing property, and ensuring financial support for loved ones. Trusts provide flexibility in managing and distributing assets, and can be tailored to meet specific needs and objectives, such as minimising inheritance tax or providing for a family member with a disability.

There are several types of trusts available in the UK, each serving different purposes:

• Bare Trusts: The beneficiary has an immediate and absolute right to the assets and income of the trust.
• Interest in Possession Trusts: The beneficiary is entitled to the income from the trust assets, but not the assets themselves.
• Discretionary Trusts: The trustees have the discretion to decide how to distribute the income and assets among the beneficiaries.
• Accumulation and Maintenance Trusts: Historically set up for children or young people to accumulate income for their maintenance, education or benefit; new trusts of this kind are now generally taxed in the same way as discretionary trusts.
• Trusts for Vulnerable or Disabled People: Designed to provide for individuals who are physically or mentally disabled, and which can qualify for special tax treatment.
• Charitable Trusts: Established to benefit a charitable cause or organisation.

Each type of trust has its own legal and tax implications, making it important to choose the right one for your specific needs.

Setting up a trust can offer numerous benefits, including:

• Asset Protection: Trusts can help protect your assets from creditors, legal claims, and financial mismanagement, and are sometimes used as part of planning around care home fees.
• Tax Efficiency: Certain types of trusts can help reduce or defer inheritance tax and other taxes.
• Control and Flexibility: Trusts allow you to specify how and when your assets will be distributed, providing control over your estate even after your death.
• Support for Beneficiaries: Trusts can provide financial support and security for beneficiaries, particularly those who are minors, have a disability, or are otherwise vulnerable.
• Privacy: Unlike wills, which become public records after probate, trusts generally remain private.

A trust functions by transferring ownership of assets from the settlor to the trustee, who manages these assets for the benefit of the beneficiaries. The settlor creates a trust deed that outlines the terms and conditions, including how and when the assets should be distributed. The trustee has a fiduciary duty to manage the trust assets responsibly and in accordance with the trust deed. This setup ensures that the beneficiaries receive the assets according to the settlor's wishes, providing flexibility and control over asset distribution.

A trustee can be any individual or entity that the settlor trusts to manage the assets responsibly. This can include friends, family members, professional advisers, or a firm of solicitors. It's important to choose trustees who are reliable and capable of handling the responsibilities, as they will be tasked with managing the assets, making investment decisions, and ensuring that the terms of the trust are followed. In many cases, more than one trustee is appointed to share the responsibilities and provide checks and balances, and we can also act as professional trustees.

Trusts can have various tax implications depending on the type of trust and how it is structured. Generally, trusts may be subject to income tax, capital gains tax, and inheritance tax. For instance, discretionary trusts are typically subject to higher income tax rates on undistributed income and can face inheritance tax entry, ten-year and exit charges, while a bare trust may have no special tax treatment, with income taxed at the beneficiary's rate. It's crucial to work with a solicitor and, where needed, a specialist tax adviser to understand the obligations and benefits. See our inheritance tax planning page for more.

Whether a trust can be changed or brought to an end depends on the type of trust and the terms of the trust deed. Some trusts allow the settlor or trustees to make changes or wind the trust up, while others are intended to be more permanent. In some cases a trust can be varied with the agreement of all the adult beneficiaries, or by an application to the court. It is important that the trust deed sets out clearly what can and cannot be changed, which is why careful drafting at the outset is so valuable.

The cost of setting up a trust depends on the type of trust and the complexity of your circumstances. A straightforward trust will cost less than a complex arrangement involving significant assets or tax planning, and there may also be ongoing costs for administering the trust, as well as potential tax charges. We offer clear, upfront pricing and will explain all likely costs before you proceed – contact us for a quote.

While trusts offer real benefits, they are not right for everyone. The main drawbacks are the cost of setting up and administering the trust, the ongoing responsibilities placed on trustees, and the fact that some trusts carry their own tax charges (including inheritance tax entry, ten-year and exit charges for certain trusts). Once assets are placed in some trusts, you also give up a degree of control over them. We will always advise you honestly on whether a trust genuinely benefits your situation.

Whether a trust is worthwhile depends entirely on your goals and circumstances. Trusts can be very valuable for protecting assets, providing for vulnerable or young beneficiaries, and controlling how and when your estate passes on. For others, a well-drafted will alone may be enough. Because trusts carry costs and tax consequences, we will only recommend one where it genuinely benefits you and your family.