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 3 separate people or companies. They don’t have to be, though: 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, collectibles, 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, 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 on 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 have their 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 most simple type of trust. They state that once the beneficiary reaches the age of 18, the trustee transfers the assets of the trusts across 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 at any point (after their 18th birthday) should they wish to do so.
They’re often used to pass assets across to people who aren’t of age just yet, but the settlor intends for them to have access to the assets when they’re old enough.
Interest in possession trust: this form of trust enables the beneficiary to receive income from the trust immediately, but they have no control over the assets that provide the income. Bear in mind this income is taxable, so the beneficiary should keep records of any money they take from the trust to make sure they’re doing things above board.
A common case we see with this type of trust is settlors giving their partners access to a ‘Interest in possession trust’ whilst they’re alive, and then usually the assets are passed along to the settlor’s children once the settlor passes.
Discretionary trust: this type of trust puts more power in the hands of the trustee. They dictate how the money is distributed to the beneficiary: when they receive the money and how much they receive.
Discretionary trusts are often used for grandchildren. The settlor will name the parents a trustee, and give them complete control over the assets to make sure the funds/assets are being distributed evenly and appropriately. It’s a great way of maintaining control over assets, and as long as the trustee is someone who you trust wholeheartedly (which they always should be), it has the potential to benefit the beneficiary more in the long term.
Trust for a vulnerable person: If the beneficiary is vulnerable, they’ll be liable to pay less tax on their trust as a result of diminished capacity. Keep in mind that if there is more than one beneficiary, only the vulnerable beneficiary will benefit from the reduced tax liability, and funds/income of each beneficiary must be kept separate.
How do I register a trust?
Previously, you didn’t need to register with HMRC unless your trust was liable for tax in the UK. However, as of 2020 new legislation was brought in that means every trust must be registered with HMRC, regardless of whether your trust has a UK tax liability.
It’s easy enough to register a trust online. To get started, you’ll need a Government gateway user ID and password, seeing as you’ll be registering on the government website.
Next, you’ll need the important details handy. This includes the name of the trust, the date it was created, personal details of the settlor, trustee and beneficiary, details of assets and more. You can find an exhaustive list of everything you’ll need here.
Once you’ve registered, filled out the necessary details and everything is set, HMRC will issue the trustee with a UTR number, which you’ll need for making self-assessment tax returns.
Do I need a solicitor to set up a trust?
Not at all. As we discussed above, you’re able to go to the government website and handle things independently if you so wish. We will say that hiring a solicitor to help you with your trust is definitely worth exploring, though.
The first thing a good solicitor will do is understand your personal, unique situation. That way, they’ll be able to give you advice on the most efficient and effective trust-type for you and your family. With so many different options available, it’s easy to get lost in a sea of choice. An experienced solicitor will use their experience and legal knowledge to help you make the right decision.
A solicitor will prevent errors from occuring, too. It’s a common, yet unfortunate, scenario with trusts: at some point along the line, details become unclear and disagreements ensue. If the details are mapped out in black and white without error, each party within the trust fully understands the terms, conditions and rules that need to be adhered to. That way, arguments are prevented and each party knows where they stand.
On top of that, they’ll be able to give advice on the most tax-efficient methods to help you take advantage of certain tax laws. This way, the beneficiary will be able to maximise the benefit of the asset the settlor has passed along.
We hope we’ve been able to give you a nice insight into the not-so-scary world of trusts. We’ve looked at what they are, who is involved and what type of trust might benefit you and your family the most. If you’ve got any questions about any of the points we’ve covered, you can get in touch with us here.
If you’re thinking about setting up a trust of your own, and are looking for an experienced legal team to make sure that your trust is set up correctly, managed efficiently and is tailored to your personal circumstances, then feel free to get in touch. We’re looking forward to seeing how we can help.