How do I set up a trust?
A trust is a legal arrangement where you (the settlor) transfer assets to individuals or a company (the trustees) to manage and hold for the benefit of others (the beneficiaries). Trusts are versatile tools used for estate planning, asset protection and tax efficiency. In this article, we outline the process of setting up a trust.
1. Define your trust’s purpose and choose the right type of trust
The first step is to decide what your goals are and what you want your trust to do. Do you want to minimise inheritance tax, protect vulnerable beneficiaries, or ensure specific asset distribution? Your reasons for setting up a trust will guide the type of trust you need.
There are various types of trust, each with unique features and tax implications. Different trust options include:
Bare Trusts: These are simple trusts where the beneficiary has full access to the assets upon reaching adulthood (age 18 in Northern Ireland).
Interest in Possession Trusts: These trusts provide income or use of an asset to a beneficiary during their lifetime, with the capital going to others later.
Discretionary Trusts: These trusts give trustees flexibility in deciding how and when to distribute assets and income to beneficiaries.
Other specialised trusts:
There are a number of alternative trust options, including those for vulnerable persons, charities, or specific asset types.
Consult with an estate planning solicitor or financial adviser to determine the most suitable trust type for your specific needs and circumstances.
2.Choosing trustees
After setting up your trust you will need to choose your trustees. Trustees can be family members, close friends or solicitors willing to act as professional trustees. When choosing your trustees, consider their qualities; look for trustworthiness, financial acumen, impartiality, and a willingness to commit long-term.
You should appoint at least two trustees as this ensures shared responsibility and helps prevent conflicts of interest.
3.Defining beneficiaries and their interests
After choosing trustees, you will then need to specify the individuals or groups who will benefit from the trust and outline their entitlements, i.e. determine how much they will receive and under what conditions.
4.Drafting the trust deed
You will then need to instruct a solicitor to draft the trust deed. The legal wording of a trust is crucial, making professional assistance vital to avoid errors or ambiguities that could lead to costly issues later.
The trust deed must clearly state the trust’s purpose, the trustees’ powers, and the beneficiaries’ rights and obligations. You should also provide guidance with a “Letter of Wishes”; this is a non-binding document that can offer trustees guidance on your intentions, especially for discretionary trusts.
5.Funding the trust
The next step is funding the trust which will involve transferring assets. This involves legally transferring ownership of the chosen assets (cash, property, investments, etc.) to the trustees.
Consider potential tax liabilities:
Transferring assets can have tax implications, so seek professional advice to navigate this step carefully.
Opening a trust bank account:
If the trust will hold cash, trustees need to open a dedicated bank account for this purpose.
6. Registration and ongoing management
Most trusts must be registered with HMRC for tax compliance and anti-money laundering regulations.
Trustees are responsible for managing the trust according to the deed, paying taxes, keeping records, and ensuring ongoing compliance.
Trustees should be prepared to seek legal and financial advice to ensure proper administration and safeguarding of assets.
Other considerations for setting up a trust
- Costs: Setting up a trust typically involves legal fees, which can range from £1,000 to several thousand pounds depending on complexity.
- Tax implications: Trusts are subject to various taxes, and trustees have responsibilities for filing tax returns and managing the trust’s tax affairs.
- Long-term commitment: Trusts can be long-term arrangements, so trustees should be prepared for the ongoing responsibilities involved.
- Settlor’s continued involvement: While a settlor can be a trustee, this can have tax consequences and may require additional safeguards to avoid potential issues.
Setting up a trust can be a complex process. However, it can provide significant benefits for estate planning and asset protection. Carefully considering your goals, seeking expert advice, and following the necessary steps can create a trust that effectively safeguards your assets and provides for your loved ones as intended.