Trusts are legal arrangements where a person (known as the “settlor”) transfers assets for example, cash or property, to a person/people of their choosing (known as “the trustees”. The job of the trustees is to then hold and manage the assets for the benefit of the beneficiaries. Trusts are often used for estate planning, to legally safeguard assets or for tax purposes and can be set up in a person’s lifetime or by their Will.
Types of Trusts
There are many different types of trusts which can be set up depending on what an individual is wanting to achieve. It may be appropriate to set up a lifetime trust to possible reduce Inheritance Tax (IHT) or manage income/capital gains tax liabilities. Alternatively, a trust can be set up within a Will to safeguard assets from any possible future remarriage or to protect vulnerable individuals who may be dealing with addiction issues or going through a divorce. It is important to note that if a trust is set up in a Will, the trust will only come into effect on the death of the settlor.
How do Trusts work?
The trust will need to be created by the settlor and the most common and sensible way of doing this is in writing, to establish the assets and terms of the trust.
The control of those assets will then be with the trustees and they will need to manage those assets in accordance with the trust.
The beneficiaries may benefit from the assets (how they benefit will depend on the type of the trust and the terms stipulated within the trust).
The trust may eventually come to an end, depending on the terms on which the trustees are acting (trusts are usually only set up for a set period of time). At that stage, the trustees will need to consider how to legally bring the trust to an end, whilst complying with any of HMRC’s requirements.
Tax Considerations
Inheritance Tax – some trusts are subject to the relevant property regime which could mean entry, exit and anniversary charges may apply.
Income Tax – the trustees may need to pay tax on income the trust earns.
Capital Gains Tax (CGT) – the trust may owe CGT when assets are sold or transferred.
Obtaining legal and financial advice is essential when considering trusts, as there are many legal complexities which need to be considered, not only in respect of the initial setting up the trust, but also during the actual running of the trust itself.
How can we help?
Speak to one of our specialist Trust and Estate solicitors today.
If you would like to discuss setting up a trust, please call us on telephone 0116 212 1000 or 01858 445 480, alternatively fill in the free Contact Us form and we will get in touch as soon as possible.
