Legal Guides

We use plain and simple English to give you an overview of the most common areas of law.

Making sense of Trusts

What is a Trust?

Although they sound complicated, Trusts are simply a wrapper to hold ‘property’ on behalf of someone else. The property might be cash, investments, houses, antiques, in fact it can be any type of asset. The Trustee or Trustees are the people that run the trust and they hold the legal title to the property but they hold it for the benefit of others who are called the beneficiaries. The trustees have certain duties and responsibilities that are written down in law and which they must comply with.

Why would I need a Trust?

Trusts have many advantages depending on the situation:

For example parents make a Will leaving everything to their children but their children are minors ie: under 18 when the parents die. The law states that a minor cannot give ‘good receipt’ for such an inheritance until they reach 18. In this case a statutory trust would be created whereby the trustees (usually the executors of the Will) would manage and invest the money on behalf of the children as they are unable to manage it themselves.  At the age of 18 the children would be entitled to receive the inheritance in full including any growth that has been created through the investments. Alternatively the parents could write a trust into their Wills which states that they do not wish their children to receive the capital until they reach a certain age ie: 25 years. In this case the Trustees would manage the money until that time although the law states that the children would become entitled to receive the income from the trust from the age of 18.

Another useful trust is a ‘Pilot Trust’ or ‘By-pass Trust’. This is a trust that is created during lifetime where the ‘Settlor’ (the person creating the trust) may be entitled to a large payment for example a large lump sum, payable upon their death. If the Settlor’s estate is already close to the Nil Rate Band for Inheritance Tax then the lump sum can be paid into the By-pass Trust which keeps it outside of the Settlor’s estate for Inheritance Tax purposes.

Life Interest Trusts are often created in Wills where a spouse wishes to benefit the other spouse to ensure they are looked after but they also wish to protect their capital; very common where spouses have children from previous relationships. For example a husband can leave a life interest for his wife regarding his share of the property. This means that she will be able to continue living at the property but also has the flexibility to downsize or sell if necessary. It protects his share of the capital in the property so that if it is sold, for example or if she were to go into care, she would be entitled to the income generated from that capital but not the capital itself. Ultimately the capital is protected and can then be left to his children when the wife dies.

These are just three examples of how trusts can be useful but there are many many more ways in which they can be used and many different types of trusts.

How are Trusts created and what types are there?

Trusts can be created by:

Deed or Will – where the Settlor writes down exactly what he wishes to leave in trust, who the trustees will be and who is going to benefit from the trust.

Statute – as above whereby an inheritance is left to minors who cannot receive it until they are 18 years old.

Equity – an area of law where a judge will decide if a trust has been created after investigating a set of specific circumstances. Most commonly where people have co-habited and both contributed to a property but the property is only in one name. The Judge will consider the circumstances and decide whether a trust has been created as a result of the actions of the parties.

There are so many types and uses of trusts that you should really take specialist advice to see if a trust might benefit you. A specialist solicitor will be able to advise you what type of trust may suit you and more importantly what charges the trust may be liable to.

Taxation of Trusts

Trusts are taxed separately from the people who are involved in them. Trust income is usually taxed at a higher rate than the individual. Some trusts are also liable for ‘exit charges’ and in some cases a liability can arise every ten years which requires Inheritance Tax to be paid. Taxation of trusts is a minefield for the unwary and it is the Trustee’s duty to get it right! If you are a trustee (for any kind of trust) then make sure you are getting specialist advice from a solicitor or accountant.

Author:

Caroline J Wilden

http://www.probate-solicitors.co.uk/

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to probate solicitors directly.

Published on 24th January 2013
(Last updated 7th May 2021)