Setting up a trust can ensure any wealth you have will only be spent according to your wishes when you pass away – and give you complete peace of mind.
Trust funds are a great way to help provide for your loved ones, protect your assets, and can also help reduce inheritance tax. In fact, you can use them to pass on your money, property and shares in the most tax efficient way.
However, you should be aware the process of setting up trusts can be filled with legal potholes that are best navigated by a professional. If you contact First4lawyers, our advisors can talk you through the range of options available and help you put something in place.
What is a trust?
In basic terms, a trust is way of dividing the ownership of an asset into two parts: the ‘legal’ ownership and the ‘beneficial’ ownership. Trusts that people use for estate planning usually involve three different parties:
- The settlor
- The trustees
- The beneficiary/beneficiaries
You set up the trust up when you (the settlor) transfers assets to the trustees, who hold the assets in trust for the beneficiary or beneficiaries.
What do I need to consider when choosing a trustee?
Choosing a trustee is never a decision that you should take lightly. In fact, choosing unwisely could seriously affect the future welfare of your beneficiaries.
When making your choice, it is vital your trustee has the expertise, integrity and skill to do the job properly. If you decide to appoint a professional trustee, you must do research and vet potential candidates before making your final choice.
What are the types of trust?
The main types of trust include the following:
- Bare trust – Also known as a ‘simple trust’. In this case, the beneficiary gains full access to the income and assets that the trust generates.
- Discretionary trust – The law considers the trustees to be the owners of the assets in a discretionary trust. Trustees are obliged to run the trust with the interests of your beneficiaries in mind.
- Accumulation trust – Trustees use the trust to generate income until the beneficiary is legally entitled to the proceeds.
- Interest in possession trust – This gives the beneficiary full access to the trust income as it accumulates. The trustee must pass all income that the trust generates (barring expenses) to the beneficiary.
- Parental trusts for minors – These are for unmarried children under the age of 18. The law treats the child's trust income as if it were the settlor’s for tax reasons.
- Settlor-interested trusts – These are designed to benefit the settlor’s spouse or civil partner. If as the settlor, you know that you may become incapacitated (e.g. through illness), you can set aside assets or funds for your own future income, or for that of your spouse, civil partner, or children.
How do I set up a trust?
It is actually quite simple to set up a trust. In fact, you can write one right now, or write a trust into the terms of your will.
But despite the ease of the process, it highly advisable that you seek professional advice beforehand in order to maximise a trust’s benefits and ensure everything is done correctly.
To make a trust legally binding, you must clearly state:
- The point at which the trust becomes active.
- Who the beneficiaries and trustees are.
- What the assets the trust holds.
I need advice with regard to setting up a trust – what should I do?
You should get in touch with professional solicitors who you can rely upon to give you the legal advice you need.
Whether you want help deciding the kind of trust to set up, or you would like to know the best ways to reduce inheritance tax with a trust, speak to First4lawyers.