Trusts are a versatile and widely used legal entity for managing and protecting assets, often playing a vital role in future estate planning, wealth preservation and helping create financial security. You might, for example, want to create a Trust to ensure your loved ones are looked after when you pass away, or use a Trust or for tax planning.
What is a Trust?
A trust is a legal arrangement where one party, the settlor, transfers assets to another party, the trustee, for the benefit of a third party, the beneficiary.
It’s a separate legal entity, like setting up a company for example.
Trusts are established to hold and manage assets, such as money, property, investments, or even personal belongings, with the primary purpose of safeguarding these assets and ensuring their intended use for the beneficiaries.
Once created your Trust will need to be registered with the Trust Registration Service and potentially also with the HMRC if it’s liable for taxes.
Common Types of Trust in the UK
There are a range of different types of Trusts, and you should definitely seek good legal advice before deciding on one. The right Trust will depend on your circumstances and what you are trying to achieve for the beneficiaries.
Bare Trust or Simple Trust
This Trust is usually created for transferring assets to minors, who gain control at a certain age (often 18).
Discretionary Trusts offer flexibility, allowing trustees to adapt to the changing circumstances or needs of beneficiaries.
Life Interest Trust
This where a beneficiary (life tenant) has the right to receive income generated by the trust assets during their lifetime. On the death of the life tenant, capital usually passes to other beneficiaries.
These are designed to support specific charitable organisations and can be used offer tax benefits for the settlor.
Family Trust or Family Settlement
These benefit family members and can be used for asset protection and passing wealth from one generation to the next with minimum taxation.
You might use a Protective Trust to protect assets for vulnerable beneficiaries, such as minors or those with disabilities.
Revocable or Living Trust
This Trust allows the settlor to retain control of the trust during their lifetime and make changes or revoke it.
Fixed Interest Trust:
This gives one or more beneficiaries a fixed income for a specified period.
A Mixed Trust combines elements of different types of trusts, often to accommodate the varied needs of beneficiaries.
Interest in Possession Trust:
This provides a named beneficiary with an immediate right to the income generated by the trust assets.
Things to Consider
While some trusts are relatively straightforward, others can be intricate and require careful consideration of legal, financial, and tax implications. Trusts operate within a complex legal framework so you should always seek good legal advice.
Using legal or financial professionals who specialise in trusts is crucial. You may need both to be fully compliant with tax laws and avoid problems down the line. Experts, like these solicitors in Ipswich, will provide advice tailored to your specific situation.
Good communication among all parties is essential and remember that circumstances change over time. What may have been an appropriate trust structure initially may need tuning later on.
While professionals play a crucial role, settlers and beneficiaries should also have a basic understanding of how trusts work. This understanding can help with communication and ensures the trust does its job. Trustees will be required to maintain accurate and up-to-date records of the trust’s activities, including financial transactions and decisions.
It’s good to view the establishment and management of trusts as a dynamic process that requires periodic review and adjustments to ensure that the trust continues to align with the goals and intentions of the settlor.
Trusts are a powerful mechanism for future planning and play a crucial role in safeguarding your wealth and providing for your loved ones in the years to come. They provide a range of benefits from asset protection to efficient estate planning. Establishing a trust is a complex legal process that requires careful consideration of your goals, beneficiaries and there are potential tax implications too. Get good legal and financial advice to ensure it aligns with your objectives and complies with current law.