What is a trust?
A trust is a legal arrangement where assets, such as money, investments, land, or buildings, are held and managed by a person or group (the trustee) for the benefit of another person or group (the beneficiary). The person who places the assets into the trust is called the settlor.
Why set up a trust?
Trusts are established for various purposes, including:
Controlling and protecting family assets:
For instance, a settlor might want to ensure their children receive assets only when they reach a certain age or after the settlor’s death.
Managing assets for those unable to manage their affairs:
This could be for minors, individuals with disabilities, or those who are incapacitated.
Tax planning:
Trusts can be used for inheritance tax (IHT) planning by removing assets from the settlor’s estate.
Providing for vulnerable beneficiaries:
Trusts can be structured to support vulnerable individuals without impacting their entitlement to benefits.
Passing on assets during lifetime or after death:
Trusts can be set up to distribute assets according to a settlor’s wishes while they are alive or as part of their will (a ‘will trust’).
Parties involved in a trust
There are three main parties involved in a trust. These are:
- Settlor – the person who creates the trust and transfers assets into it.
- Trustee – the legal owner of the assets, responsible for managing them according to the trust deed and acting in the beneficiaries’ best interests.
- Beneficiary – the person or people who benefit from the trust assets.
Trusts: key considerations
- Complexity: Setting up and managing trusts can be complex, and seeking professional advice from a solicitor or financial adviser is recommended.
- Tax implications: Different types of trusts are subject to different tax rules (income tax, capital gains tax, and inheritance tax).
- Types of trusts: There are various types of trusts, such as bare trusts, interest in possession trusts, and discretionary trusts, each with specific rules and implications.
In essence, a trust allows for the separation of legal and beneficial ownership of assets, enabling structured and controlled distribution for various purposes, whether for estate planning, asset protection, or supporting specific individuals.