The idea of a ‘Trust’ is enough to have most of us running for the hills. It’s often billed as a complex financial instrument reserved for the well-to-do families of the world – something that most of us ought to shy away from. We’re happy to report that Trusts are actually used for the benefit of everyday families – not just the children of CEO’s and Oligarchs. Although there’s a lot of detail involved, they’re not quite as complex as we’ve been led to believe. In this detailed guide, we’ll go through all you need to know about trusts, break things down into simple terms, and give you more of an idea of what they are, how they work, and why they might be worth exploring. Let’s take a look.
What is a trust?
Think of a trust as an arrangement that allocates assets into an account for the benefit of another person at a future date.Let’s use an example: John owns a string of properties, and he wants to leave one of the properties to his niece Sarah. John doesn’t want Sarah to have the property now, but he does want her to have it further down the line – when she’s old enough to fly the nest and live on her own.
He’ll transfer the property into Sarah’s name now (known as ‘transferring the asset’), but he’ll set out terms which stipulate when Sarah is entitled to the property, what she is able to do with the property, and other rules that Sarah will have to follow. John no longer technically owns the property, yet Sarah isn’t able to take ownership of the property until the terms of the trust have been met. That’s a simplistic definition – there’s a lot of nitty-gritty involved, and we’ll look at the rest of the details throughout this guide.
What is the purpose of a trust?
The main reason is to monitor/control who gains access to your assets. It also helps you to set out the terms for those assets as well, and that gives you a degree of influence on how those assets will be managed when they’re passed across. Keeping assets in the family or making sure your life’s work is passed along appropriately are two of the big reasons we see for people creating a trust.
For example, you may want to put some money in a trust for a family member to use for education purposes only – an educational trust. If those terms are clearly set out in the trust, it means that legally, the beneficiary (the person who receives the assets) will only be able to use the money for education purposes. If you’re worried about your assets being mismanaged or misused, a trust gives you an element of control.
Who is involved in a trust?
There are 3 main roles you need to be aware of when it comes to Trusts:
The Settlor: think of the settlor as the person who creates the trust. They transfer the asset, a property or sum of money, for example, into the trust. They appoint the trustee and determine the rules the trustee needs to follow when managing the trust. Usually, only one settlor is involved, but you can have more than one if you wish to do so.
The trustee: the trustee legally owns the trust, but they do not benefit from the trust. Their role is to hold or use the trust on behalf of the beneficiaries, who we’ll talk about below, but they are not allowed to use the trust for their own gain. This is a key distinction – they oversee the trust but do not directly benefit from it. It’s up to the trustee to uphold the terms of the trust and make sure that the rules set out are being adhered to, which is known as Fiduciary Duty
The beneficiary: this is the person(s) who stands to benefit from the trust. They are the reason the trust was set up in the first place, and when the conditions of the trust deed have been met, they will be able to take advantage of the trust. It’s also worth noting that the beneficiary cannot change or manipulate the details of the trust deed, and it’s up to the trustee to make decisions in line with the terms set out in the trust deed.
Usually, the settlor, trustee, and beneficiary are three separate people or entities. However, they don’t have to be: a settlor or trustee can actually be the beneficiary of a trust, although it’s not very common.
Transferring the assets
Let’s talk about the assets themselves. The first step is to decide the type of asset you’ll be transferring. Trusts can be made up of a broad range of assets, including but not limited to cash, stocks, bonds, collectables, classic cars, artwork, and real estate.
If you’d like, you can place the assets into the trust all at once, or if you’d rather add to the trust over a period of time, you can do that too – as and when it suits you. Just make the additions and deposits that you’d like to and add them to the trust deed.
After the assets have been added to the trust, it’s now up to the trustee to manage things appropriately. By this point, the terms will have been set out in the trust deed, so the rules and guidelines are there for the trustee and beneficiary to respect and adhere to.
If you need help transferring the assets, seek legal help to make sure all bases are covered. You’ll have added peace of mind that your trust has been created correctly, and it’s a great way to prevent expensive headaches further down the line.
Wills vs trusts
The key difference here is that with a will, you’re deciding what happens to your assets once you are deceased. Yet until that point, those assets belong to you to use as you see fit. With a trust, as soon as the settlor signs the asset over to the trustee, they are no longer the owner of that asset. That being said, a trust doesn’t include all of your assets – it simply includes the assets you wish to transfer to the beneficiary rather than your entire estate.
Wills also handle aspects that a trust cannot. For example, who will look after your children in the event of your death, or where your pets will go. Things like funeral arrangements are also covered in a will, whereas a trust is strictly for the transfer of your assets.
Another thing worth bearing in mind is that if a will and a trust conflict, a trust will take precedence. Essentially, that means that the assets in the trust will go to the beneficiary of that trust, and that overrides what is said in the will. Any other assets that aren’t included in the trust yet are included in the will are subject to the instructions of the will.
Types of trusts
As with anything, trusts take on many different forms, and each has its own positives, drawbacks, and guidelines. The trust you choose largely depends on your objectives and how you want your assets to be controlled. Let’s take a look at some of the most common:
Bare trust: the most common and also the simplest type of trust. They state that once the beneficiary reaches the age of 18, the trustee transfers the assets of the trust to the beneficiary. Keep in mind that although the beneficiary doesn’t have to take control of the assets as soon as they turn 18, they are legally entitled to do so at any point (after their 18th birthday).
Discretionary trust: This type of trust offers more flexibility to the trustee. The trustee has discretion over how and when to distribute the trust assets among a group of beneficiaries. The trustee can consider various factors such as the beneficiaries’ needs, financial circumstances, and other relevant considerations when making distribution decisions.
Charitable trust: As the name suggests, this type of trust is established for charitable purposes. The assets in a charitable trust are used to support and benefit specific charitable causes or organisations. Charitable trusts can provide tax benefits and allow individuals to contribute to causes they care about.
Revocable trust: Also known as a living trust, a revocable trust allows the settlor to retain control over the trust assets during their lifetime. The settlor can make changes, amend, or even revoke the trust if desired. This type of trust is commonly used for estate planning purposes to avoid probate and provide for the management of assets in case of incapacity.
Irrevocable trust: In contrast to a revocable trust, an irrevocable trust cannot be altered or revoked once it’s established, except under limited circumstances. The settlor relinquishes control over the trust assets, and they are no longer considered part of the settlor’s estate. Irrevocable trusts can offer tax benefits and asset protection.
Testamentary trust: This trust is established through a will and takes effect after the settlor’s death. It allows the settlor to provide for the management and distribution of assets to beneficiaries according to their specified instructions.
These are just a few examples of the many types of trusts available. Each type serves different purposes and has its own legal and financial implications. Consulting with an experienced attorney or financial advisor can help you determine which type of trust aligns with your specific goals and circumstances.It’s important to note that trusts can be complex legal arrangements, and it’s recommended to seek professional advice when creating and managing a trust to ensure compliance with applicable laws and regulations.
How to Choose the Right Trust for You
Selecting the right trust for your needs requires careful consideration of your objectives, assets, and beneficiaries. Here are a few factors to keep in mind when making your decision:
Objectives: Clearly define your goals and intentions for creating a trust. Consider whether asset protection, estate planning, tax benefits, or providing for specific beneficiaries are your primary concerns.
Assets: Take stock of your assets and determine which ones you want to include in the trust. Different types of assets may be better suited for certain types of trusts. For example, a family business may be best protected through a different trust structure than a real estate property.
Beneficiaries: Consider the needs, circumstances, and relationships of your beneficiaries. If you have minor children, you may want to set up a trust that provides for their education and well-being until they reach a certain age. If you have charitable intentions, a charitable trust may be the appropriate choice.
Flexibility vs. Control: Assess how much control you want to retain over the trust assets. Some trusts offer more flexibility for beneficiaries or trustees to make decisions, while others provide stricter guidelines and control.
Legal and Tax Considerations: Consult with a solicitor or legal professional who specializes in trusts to ensure you understand the legal and tax implications of different trust structures. They can help you navigate the complexities and ensure compliance with relevant laws and regulations.
Trusted Resources for Further Information:
To delve deeper into the topic of trusts and gain a better understanding of their intricacies, you may find the following resources helpful:
The Law Society: The Law Society is the professional association for solicitors in England and Wales. Their website provides guidance on trusts and offers a directory to help you find a solicitor specialising in trusts. Visit their website: The Law Society.
Gov.uk: The UK government’s official website offers comprehensive information on trusts, including guidance on setting up and managing a trust. You can access their resources on trusts here: Gov.uk – Trusts
The Society of Trust and Estate Practitioners (STEP): STEP is a global professional body for practitioners specialising in trusts and estates. Their website offers valuable resources, including articles, guides, and professional directories. Explore their website: STEP
Remember, it’s crucial to rely on trusted sources and consult qualified professionals to ensure that you have accurate and up-to-date information when it comes to trusts and legal matters.
Trusts are versatile legal tools that can serve various purposes, from protecting assets to facilitating estate planning and providing for beneficiaries. Understanding the different types of trusts and seeking professional advice will help you make informed decisions that align with your goals and ensure the effective management of your assets. If you have any further questions or need assistance with setting up a trust, don’t hesitate to reach out to us. Our experienced legal team is ready to guide you through the process and tailor a trust to your specific circumstances.We hope this guide has provided you with valuable insights into the world of trusts and helped you feel informed on the necessary steps to protect your assets and secure the financial future of your loved ones through the appropriate trust structures.