What is a trust and is it the right thing for me?

When you’re planning for the future, you want to ensure that your assets; such as land, property, money and investments, are safe and ensure that your loved ones have financial stability in the future. But what are the options available to enable you to do this and how can you ensure that your assets are passed on to the right people?

The first thing that comes to mind when people think of passing assets on to their loved ones is the form of a will. It’s the commonly used method in TV shows and films, where a person inherits an amount of money, a house or another asset after the death of a family member.

This differs from a trust where you can control assets for your chosen beneficiaries, whilst you are still alive or even after your death. This can be done by a trustee, who acts as a settlor, to pass on to the beneficiary, but what do these terms mean?

Who does what in a trust?

The main people involved when discussing the workings of a trust are:

Settlor

This is the person who puts the assets into a trust. This could be a parent or grandparent who wants to pass assets onto their child.

Trustee

The manager of the trust. They do it in line with the settlor’s wishes as set out in their trust deed or their will. This can be a law firm or an individual, such as a trusted family member, who meets the trustee criteria, such as age.

The beneficiary

This is the person or persons who benefit from the trust.

What trusts are available to me?

There are a number of different trusts available, depending on the level of control you want to implement and the power you want to give to your trustees. They can include:

Bare Trust

Seen as the simplest type of trust, this gives all assets to the beneficiary, as long as they’re aged 18 or older. These can be set up when the beneficiary is under this age, being held and looked after by the trustee in the meantime, and coming into effect once the beneficiary turns 18.

Discretionary Trust

This differs from a Bare Trust as the assets and income they generate are only made available to the beneficiaries as and when the trustees decide. An example of this in use is a person setting up a trust for their grandchildren, with the grandchildren’s parents being the trustees.

Trusts for Vulnerable Beneficiaries

These trusts are similar to the above but are set up for disabled people, those who have lost a parent or orphans and qualify for special tax treatment.

Interest in Possession Trusts

These are set up so that the trustee must pass on all trust income to the beneficiary when it arises. An example of this is where income from shares may go to a person’s child and when they pass away it goes to their grandchild. The beneficiary has an interest in possession as opposed to rights to the actual shares.

Why set up a trust?

There are a number of reasons why a trust may be a better option for you than a conventional will. One of the main benefits is the control that a trust provides the settlor, as highlighted below:

Trusts to keep control of assets

Firstly, it can support family members who can’t manage money. Instead of the beneficiary receiving a lump sum in a will, the settlor will give the trustee the power to distribute funds over a period of time, such as when the beneficiary turns a certain age, to ensure the funds don’t get spent all at once. It also can specify how the funds can be used, such as on a house deposit, health care or university fees.

Trusts and Inheritance Tax

It can also mitigate the effects of inheritance tax. With inheritance tax of 40% being applied to any portion of an estate that exceeds the threshold of £325,000, assets that are placed in a trust are no longer considered the legal property of a settlor, once it has been held in trust for a period of 7 years. Of course, different tax rules would apply and there are caveats to the above, such as the settlor having no interest in the trust, so we would recommend getting expert advice before making such a move.

Trusts and Care Home Fees

If you need long-term care, you will undergo a means test which looks at your income, property you own and capital to calculate whether you are eligible for care fee assistance. If the value of your capital is above this limit, you need to self-fund your own care, which can include selling your property.

Instead, you can put your property in a trust before going into care. The property is then not considered to be owned by you and cannot be used to fund your care. However, you will still be able to live within it for the period before you go into care.

In summary, trusts can be an effective tool used in planning to protect the wealth you’ve built up, ensuring it passes to your intended beneficiaries, whilst having some say in how the trust is run.

Trusts are great for people who:

• Have an Inheritance Tax issue and want to protect the wealth they pass onto their beneficiaries.
• Are concerned about the costs of long-term care.
• Want to ringfence their assets and specify how they’re managed.

Want to discuss trusts in more detail?

If you need any advice on whether a trust is the right plan for you, the Wealth Experts team are here and happy to help.