Trusts are legal arrangements where a person (the settlor) transfers assets i.e. cash or property, to another person (the trustee) to hold and manage the assets for the benefit of somebody else (the beneficiary). Trusts are often used for estate planning, to protect wealth or for tax purposes. Trusts can be set up in a person’s lifetime or by their Will.
Lifetime Trusts
These are Trusts that are set up during a person’s lifetime and take effect straight away. There are several types of lifetime Trusts, most commonly:
- Bare Trust – these are often used to pass assets to children upon them reaching a certain age, usually 18. They are the simplest type of trust, and usually the beneficiary is treated as the owner for tax purposes.
- Interest in Possession Trusts – these give a person the right to income i.e. interest or rental income, whilst the capital (the actual asset) is preserved for someone else. They are commonly used to provide an income for a spouse whilst ensuring that the capital passes on to children.
- Discretionary Trusts – these offer the trustees full decision making abilities over what, when and how much any person might receive. They offer flexibility and useful where you wish to provide for a number of people, whilst taking into account changing circumstances such as a person’s health, needs or financial situation.
Whilst lifetime trusts can be useful for Inheritance Tax planning, they can be subject to tax charges and may face higher rates of tax.
Will Trusts
These trusts are created through a person’s Will and come into effect only on death. There are several types of Will Trusts, most commonly:
- Discretionary Will Trusts – similar to a lifetime trust, these allow trustees to distribute assets based on a person’s circumstances or needs. They offer flexibility and can be helpful where circumstances are uncertain and may also assist with tax planning.
- Life Interest Trust – these trusts can provide a person (usually a spouse) with income for life or the use of an asset such as a house, whilst preserving the capital for others (such as children) after their death. They are often used in second marriages or to help mitigate the payment of long term care costs.
- Vulnerable Person Trusts – these trusts are specifically designed to support children or adults who are disabled or otherwise vulnerable. They can offer favourable tax treatment if certain conditions are met.
In summary, Trusts are powerful tools for managing for assets and protecting your loved ones, but whether a Trust is right for you will depend upon your personal circumstances and your goals. It is crucial that you seek legal and financial advice when considering setting up a Trust to ensure that is achieves your aims, and complies with legal and tax requirements.
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