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Trusts - Frequently asked questions

• What is a Trust?
• What different types of trust are available?
• What is the purpose of a trust?
• Is a Trust going to be necessary or beneficial in my case?

What is a Trust?

A Trust is a legal device for protecting assets and controlling their future destiny. It is created by a deed or Will and requires a 'settlor' (the person who wants to put assets into a Trust) and 'trustees' (the people who are then legally responsible for managing the assets put into the Trust and ensuring that the objectives of the Trust are carried out). Usually once an asset has been transferred into a Trust it is held by the trustees for the benefit of the 'beneficiaries' (the individuals named in the deed or Will by the Settlor), who benefit from the income arising from the asset, or the use and enjoyment of the asset. Trusts are regulated by the specific provisions of various Trustee Acts and general trust law, and the trustees are generally subject to different tax rules and regulations than those applying to individuals.

What different types of trust are available?

There are various types of Trust which are described below. Trusts can also be created in respect of life insurance policies and other investment bonds to help counteract the effects of Inheritance Tax and Capital Gains Tax.

• Interest in Possession ('life interest') Trusts
  These usually provide that the income from the trust assets is payable to an individual (the 'life tenant'), and may also provide for rights of occupancy in a property. On the death of the life tenant, the trust may terminate in favour of named individuals who receive the trust assets outright, or the trust may continue.
• Discretionary Trusts
  These provide for specified individuals or classes of individuals to benefit from the trust assets at the discretion of the trustees of the trust, and can be very flexible in catering for the wishes of the settlor in changing circumstances in the future.
• Accumulation & Maintenance Trusts
  These are a particular form of discretionary trust which have inheritance tax advantages, and are very often put in place by grandparents to provide funding for the education needs of their grandchildren.
• Personal Settlements
  These are created during the lifetime of an individual, and that individual reserves the right of income from the assets of the trust during his or her life, and on death the assets in the trust then pass to specified individuals or classes of beneficiary. This form of trust does not have any advantage for Inheritance Tax purposes, but can be advantageous to preserve capital.
• Bare Trusts
  These can be set up for children under 18, normally by grandparents, to make use of a child's income and capital gains tax allowances while they are under 18, when they become entitled to the trust assets outright.

What is the purpose of a trust?

Life interest trusts, discretionary trusts, accumulation and maintenance trusts and trusts of insurance policies can be used to help mitigate Inheritance Tax and/or maintain control over assets when for whatever reason it may not be appropriate for the beneficiaries to have outright control and entitlement to the assets held in the trust. It is advisable to appoint appropriate people as trustees and then give them wide investment powers and other trustee powers under the trust deed or Will. It is also possible to create offshore trusts, very often in the Channel Islands or Isle of Man, which can prove to be advantageous for tax purposes in very specific circumstances, for which we can provide expert advice.

Personal Settlements are very often used for the protection of assets and to guarantee the destiny of those assets. Historically these trusts have been put in place on marriage, being funded by the parents or indeed the spouses, in order to protect assets should the marriage fail and preserve the assets for any children of the marriage.

As a means of providing for others, discretionary trusts and charitable trusts are often created. Discretionary trusts may be put in place to provide funds for the disabled as an addition to State and other benefits. For example, if capital sums or income were made available direct to such an individual their entitlement to benefits could be affected, whereas funds held under discretionary trusts can avoid this problem.

Interest in Possession Trusts are also utilised where there is an intention to provide income for occupancy or enjoyment of property by someone for his or her lifetime, or for any shorter period, whilst ensuring the ultimate destiny of the trust assets

Is a Trust going to be necessary or beneficial in my case?

There has been an increasing use of trusts in recent years as they can be used to solve many problems and are not always as expensive as some people think. Clearly they need to be explained in layman's language, but provided expert advice is given they can be invaluable. Please contact us to discuss the use of trusts in particular circumstances. It is likely that we will raise the issue of trusts and their use with you in the context of Wills and Inheritance Tax planning.