What is a Trust?

Trusts are one of the oldest forms of legal instruments and have been in use at least since the Crusades as a way for people to control and protect their wealth.

In simple terms, a Trust is the formal transfer of assets from you (the Settlor), which might be property, shares, cash etc., to what is known as an ‘artificial legal personality’ that is controlled by a small group of ‘Trusted’ people (the norm is two but can be up to four) known as “Trustees”, which with some types of Trust can be you, with instructions that they hold the assets for the benefit of Beneficiaries i.e. those who will ultimately benefit from the income the Trust produces or the assets it holds. Trust can be made either during your lifetime (inter vivos) or after your death via a Will (postmortem).

The rules by which the Trust operates are set out in the Trust Deed, which is sometimes known as a Settlement and, whether the transfer is by lifetime settlement or by Will, the Trust instrument states who is responsible for looking after the gifted assets (the Trust Fund), who are to benefit (the Beneficiaries), and any rules or conditions to which the Trustees and Beneficiaries must adhere. In other words, the Trustees are the legal owners but the beneficial owners are the Beneficiaries.

As Trusts have their own legal personality, they also have their own lifespan which can be anything from a few years to the current legal maximum of 125 years. That said, Trusts can have powers which allow the Trustees to create further Trusts; and Charities, like Limited Companies, can effectively exist in perpetuity. They are also subject to tax.

Reasons for creating Trusts

A Trust is created to keep the control of the assets in the hands of the Trustees. For example, a company owner could transfer some of the shares into Trust for the benefit of children but retain control of the voting rights on those shares as first named Trustee. Alternatively, the person setting up the Trust (the Settlor) may wish to benefit a person who is infirm or disabled or someone who may otherwise squander the money, by transferring the property to Trustees to deal with the management of the property and ensure that the Beneficiary obtains the benefit that the Settlor wishes them to have.

Trusts are widely used in estate and tax planning to obtain more favourable tax treatment, and can result in significant mitigation and/or deferment of Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT). That said, gifts or capital whether in cash or kind which are above the Nil Rate Band (the amount one can give away free of IHT) are known as Chargeable Lifetime Transfers (CLTs) and can be liable to entry, periodic and exit IHT charges. This is a complex subject and you please contact us if you require more information.

Types of Trust

A Disabled Discretionary Trust (also known as a disabled person’s trust and a vulnerable person’s trust) is a special type of trust used to benefit a disabled beneficiary. The trust will name a principal beneficiary and whilst they are alive, the trustees will use both the income and capital of the trust for the principle beneficiary’s benefit as they see fit.

Discretionary Trusts are one of the most commonly used trusts. In simple terms a Discretionary Trust is one under which the trustees have the power to use the trust assets for the benefit of any of the named beneficiaries as they see fit. No beneficiary has any right to any of the assets in the trust, they only have a chance that the trustees could benefit them. The main reasons to use a Discretionary Trust come under two different arms; protection and flexibility.

A Flexible Life Interest Trust (FLIT) can allow a person (usually a surviving spouse or civil partner) to benefit immediately upon your death all whilst protecting the value of assets for other eventual beneficiaries. The FLIT is a great means of providing for your spouse without passing your assets directly to them, and also offers long term protection for your family potentially across multiple generations. It combines the benefits of a life interest trust and a discretionary trust, so is ideal for flexibly providing for a surviving spouse for their lifetime and also offering ongoing protection of assets for the family going forward.

A Protective Property Trust (PPT) is one of the most widely used trusts in Wills today. The trust will usually take your share in your home and give another person, usually a surviving spouse or civil partner, a life interest in it. The terms of the trust would allow the surviving spouse to continue living in the property free of rent and without any interruption, usually for the rest of their lives. They are referred to as the ‘life tenant’. A PPT will usually include provisions allowing the life tenant to downsize or purchase a substitute property, meaning that just because their share of the property is in trust they can still move should they wish. The trust also gives the life tenant an entitlement to income.

A Right to Occupy Trust (RTO) in its simplest nature allows a person (the occupant) to live in a property after you have died for the rest of their life, or for a certain amount of time, or until they attain a certain age. This will be without the payment of rent but the occupant will need to pay all outgoings (such as bills) and keep it in a good condition. RTOs generally do not allow for the occupant to move property and will end if the occupant stops living in the property but powers to move can be included if desired.