A trust in time
The trust is a concept hallowed in English law for centuries. Not all legal jurisdictions recognise trusts but the UK is fortunate in having a robust system of trust law which enables property and persons to be protected in a multitude of different circumstances.
Essentially, a trust can be described as a person or persons holding assets on behalf of another/others.
The types of trust as well as their uses are many and varied. Whether looking, for example, for asset protection, providing for vulnerable beneficiaries, tax planning or preserving confidentiality, we believe that the appropriate use of trusts is a key element to general estate planning.
Whilst the terms of a trust can be almost infinitely variable and adaptable to the particular circumstances, it is helpful to be aware that there are two basic trust structures:
- Life interest trust – one beneficiary is entitled to the income from the trust during their lifetime with the capital passing to other beneficiaries on their death.
- Discretionary trust – in this case, the trustees are given complete discretion to use the income and capital from the trust for the benefit of any of a number of beneficiaries. The creator of the trust specifies the people who may be benefitted but the trustees determine who will actually benefit at any time, the trustees often being guided by a letter of wishes made by the creator of the trust setting out their intentions with regard to the administration and distribution of the trust funds. The following summarises just a few areas where trusts are commonly and can usefully be adopted.
Trusts in Wills can be used in a variety of ways to provide for those left behind:
- A life interest trust may be established in relation to a property or share of a property to allow one beneficiary to remain in the property for their lifetime but ensure the capital value of the asset is preserved for the ultimate beneficiary. This is particularly common in second marriages in order to provide for a surviving partner whilst protecting capital for the ultimate benefit of children of the first marriage.
- A life interest trust can be used to provide an income for one individual for their lifetime with, again, the capital assets ultimately passing to other individuals or causes.
- A discretionary trust is an extremely efficient way of ensuring that vulnerable or disabled beneficiaries are protected and provided for (without jeopardising any state benefits to which they may be entitled).
- A discretionary trust can be used to enable the executors to determine how to distribute the estate in the most tax efficient manner for the benefit of all the beneficiaries at the time
- The person creating the trust may also act as trustee. A trust created in one's lifetime can therefore be extremely useful in passing down assets to the next generation in order to reduce the value of the estate for inheritance tax purposes whilst still maintaining control of those assets.
- A "pilot" trust can be created during lifetime to receive undrawn pension benefits and life policy proceeds which become payable on death – an essential tool to inheritance tax planning.
For individuals who are internationally mobile, establishing an offshore trust may form a key part of their estate planning when considering making an investment in the UK, purchasing a key asset or considering relocating to settle permanently in England and Wales. Equally, careful thought has to be given to dismantling any trust of this type which has already been established, should it no longer be required, in order to ensure that this is done in a tax efficient manner.
Individuals who have particular causes or charities they are passionate about may wish to establish a charitable trust to have greater involvement and control in their charitable giving.
Administration of trusts
An important aspect in the creation of a trust is the appointment of trustees to administer it. Trustees must be chosen carefully: common law and statute imposes strict duties on trustees but they may also have considerable powers.
Recent legislation imposes rigorous reporting requirements for trusts, failure to comply with which can result in fines and ongoing support in the administration of the trust is essential.
The tax consequences and implications of setting up a trust and the tax regime governing the ongoing administration of the trust always require very careful consideration when creating a trust.
As highlighted here, trusts can be created to suit all sorts of circumstances. They can also be extremely flexible and it is certainly not a case of "one size fits all".
The Private Wealth team at Trowers & Hamlins can assist you and your adviser in respect of all trust related matters.