SETTING UP A TRUST
Trusts can easily become quite complicated so it’s important to speak to a professional to discuss your own circumstances if you are considering using one. The legal wording of a Trust needs to be correct, so using an expert is very important.
When you choose to set up a Trust, you will need to select a set of Trustees who will then manage it on your behalf. You can be a Trustee of your own Trust, along with anyone who you deem appropriate, as long as they are over the age of 18. Generally, it’s good practice to appoint at least two Trustees and no more than four, one of whom can be a company or organisation as your Trustee.
Once you have made your decision, you will need to establish the rules that govern the terms of your Trust. You will need to consider who you want to benefit and when – for example, would you like your beneficiaries to receive regular payments or lump sums at particular life stages? It’s important to take some time to establish how you want your Trust to work so that the right structure can be chosen, and arrangements made. Regular reviews should also be undertaken. Letters of wishes serve to give the Trustees guidance after you have passed.
The taxation consequences of the various Trusts can be quite surprising, although careful investment advice can mitigate that.
TYPES OF TRUSTS
There are a range of different types of Trusts, each with various tax rules, so planning correctly is important. The main Trusts used in the UK are:
Bare Trusts tend to be used if you want to pass any of your assets to a young person, usually a child or grandchild, who is under the age of 18 (or 16 in Scotland). Your beneficiary has the right to all of the capital and income of the Trust at any time once they reach the required age; your Trustees will simply look after the assets until the beneficiary is old enough.
INTEREST IN POSSESSION TRUSTS
These Trusts offer a way to pass on an asset whilst providing for others. One beneficiary has an automatic right to any income generated by the asset whilst the asset itself will ultimately pass on to another beneficiary. For example, you can choose for your spouse to receive income from your share portfolio, with those shares ultimately passing to your children on the event of your spouses’ death. It is no longer possible to set up these Trusts during your lifetime, although they remain available under your Will.
Discretionary Trusts allow Trustees to make decisions about how any income from the Trust, and the capital, is used. These decisions may include how much is paid, to which beneficiaries and how often. They are commonly used if you anticipate a future need, such as a grandchild who may need more financial support than others, where a beneficiary’s marriage is in trouble or where someone will never be capable of looking after their own finances.
Trusts can also be set up under your Will, and these are useful where you need flexibility, or where the rules you want the Trustees to apply would be very lengthy and complicated if incorporated in a Will. If wound up within two years of your death, the actual final distribution is treated as if it had been the position at date of death, thus preserving spousal and charity exemptions. Careless use of Trusts within Wills can impact the Main Residence Nil Rate Band for Inheritance Tax.
FOR MORE INFORMATION
When establishing a Trust, it’s vital that your personal circumstances and requirements are carefully reviewed so that the right plans can be put in place.
We can help guide you through the process of setting up a Trust, in line with the needs of you and your family. Please contact your nearest office to discuss your plans in more detail.