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A trust is a legal entity with separate and distinct rights. They are legal arrangements for managing assets. There are different types of trusts which are taxed differently.
Looking to cut to the chase? If you’re looking for a solicitor to help you set up your trust, just call us on 020 3007 5500, or submit a contact form.
What is a trust?
A trust is a useful tool that protects your assets and ensures the future financial stability of your loved ones. You can place different kinds of assets into a trust, including cash, shares, investments, real property, and land.
Trusts are also used to ensure the proper distribution of your assets according to your wishes or to keep control of who will receive assets in the future. They may offer benefits including saving time, reducing paperwork, and sometimes reducing taxes on the assets within them.
Who are the key parties?
A trust is a legal arrangement between 3 key parties – the settlor, the trustees, and the beneficiaries.
The Settlor
The settlor is the person who creates the trust. They are the original legal owner of the property within the trust. A settlor can be one or multiple individuals, a company, or some other legal entity.
If you write your will in such a way that there are trusts created to help manage assets for the benefit of your beneficiaries or to preserve assets for your children, you are a settlor of that will trust.
The settlor should record how they wish for their trustees to use the assets within the trust. You can include this information in the will for a will trust or you may set it out in a “trust deed” if the trust is set up during the lifetime of the settlor.
Trustees
The trustees are the new legal owners of the assets within the trust. By creating the trust, the settlor transfers legal ownership of the trust property to the trustees. The trustees are responsible for ensuring that they meet the settlor’s wishes relating to the assets within the trust.
Trustees will also decide how to invest and use the assets and they manage the day-to-day aspects of the trust, such as paying any tax due.
Beneficiaries
Lastly, the beneficiaries are the people named in the trust deed who receive the benefit of the assets within the trust. This may take the form of occupation of a property, income from rent, dividends, or interest.
The same beneficiary or different beneficiaries can benefit from the capital of the trust depending on the terms of the trust deed.
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Categories of trust.
There are many different types of trust, but all trusts fit into one or more of the categories listed below.
Funded or unfunded
If a settlor places assets within a trust during their lifetime, then it is a funded trust. Unfunded trusts will consist of only the trust agreement, with no funding. An unfunded trust can become funded upon the death of the settlor, or in some cases can remain unfunded.
It is important to ensure the proper funding of a trust, as failing to do this can expose the assets to many dangers that the trust should guard against. This could lead to the failure of the whole trust arrangement.
Living or testamentary
A living trust is a document that the settlor makes during their lifetime. They will sign the trust deed and transfer assets to their trustees whilst they are still alive.
You would write a testamentary trust in the settlor’s will so it will only come into existence after the settlor passes away.
Revocable or irrevocable
A revocable trust is a trust that the settlor can change or end during their lifetime. An irrevocable trust cannot change once established. They contain assets that are permanently moved out of the settlor’s legal ownership. Irrevocable trusts are usually used to lessen taxes upon the settlor’s death.
What types of trust are there?
Listed below are some of the most common types of trust and how they could be useful to you.
Bare trust
A bare trust is where the trustee holds assets that pass on to the beneficiary. In England and Wales, the beneficiary of the trust has the right to all the capital and income of the trust at any time if they are 18 years old or over (unless there are contrary wishes in the trust deed). The assets inside the trust will therefore always pass on to the intended beneficiary.
This type of trust may exist where a settlor used a trust to look after and pass on assets to young people. When the young people reach the age of 18, the trustee will often hold the assets in a bare trust because the 18-year-old can call for the assets to transfer straight to them.
Interest in possession trust
An interest in possession trust allows the income in possession beneficiary to receive income from the trust immediately. However, that beneficiary will be unable to control the assets that provide the income (the capital of the trust) and will need to pay income tax on any money that they receive. You can name different beneficiaries as capital beneficiaries.
You would likely use this type of trust to pass assets on to your spouse or civil partner, with assets used during their lifetime to look after them. After your spouse or civil partner dies, the trust will preserve your assets and pass them to your children.
Discretionary trust
A discretionary trust gives the trustees total control over assets and their generated income. The beneficiaries of this kind of trust are usually a class of people (such as the settlor’s children or grandchildren). The trustees can decide when and how the assets are then passed on to the beneficiaries.
Trustees can decide:
- what they pay out of the trust;
- which beneficiaries to make payments to;
- how often to make these payments;
- whether there are any conditions to impose on the beneficiaries.
For more information on the types of trust that are available to you, visit GOV.UK.
Elisabeth's Top Tip
As a settlor, you may use this type of discretionary trust for your grandchildren, with their parents as the trustees.
Need help setting up a trust?
If you require assistance setting up a trust, contact our expert trust solicitors today. They can help you to identify what assets you could include in your trust, who your trustees and beneficiaries should be, and when the trust will become active.
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Common purposes of a trust.
Here are some common reasons behind people choosing to create a trust.
Estate planning
If you fail to plan your affairs in advance of your death, you may leave your estate in disorder. The probate process can result in time delays, administration costs, and tax liabilities.
Therefore, setting up a trust during your lifetime could be the best alternative to plan what will happen to your estate after you die. The arrangements set out in the trust can include providing a source of income for a spouse or civil partner for life, making provision for the education of children, or providing care to family members should they fall ill.
Tax planning
Assets within a trust are no longer considered as belonging to the settlor. Therefore, income and capital gains tax applies to assets that the trustee may receive. There could be tax reductions when income passes on to beneficiaries who have a lower income tax bracket than the trustees.
A trust can also eliminate inheritance tax on some assets within the trust. Trusts are subject to very complex inheritance tax rules of their own so advice should be sought about this before you decide to put a new trust in place.
A correctly structured and administered trust may therefore be more tax efficient.
Confidentiality
Once probate begins for your estate, your will becomes publicly available as it is a public procedure. It could therefore be unsuitable for those who wish to keep the details of their assets or their beneficiaries confidential.
The transfer of a settlor’s assets via a trust will generally keep the trust’s assets confidential, when you register your trust arrangements with HMRC. The trust register is not searchable by the public like the probate records are.
Tax responsibilities.
Income tax
Different types of trust income will have different rates of income tax.
For example, the government taxes trust income up to £1000 at the standard rate of 20%, with income over £1000 taxed at 45%. The trustees pay this tax on all income but can claim some tax back depending on the beneficiaries’ tax brackets.
For more information on Trusts and Income Tax visit GOV.UK.
Capital gains tax
Capital gains tax is a tax applied to the profit made when an asset has increased in value at the time a trustee transfers it (sale or gifts). This tax could be payable when you place an asset into a trust, take it out of a trust, or when a beneficiary becomes “absolutely entitled” to a trust.
Often, if the trust is subject to inheritance tax, then the trustees can claim relief from capital gains tax.
For more information on Trusts and Capital Gains Tax visit GOV.UK.
Inheritance tax
When you put assets into a trust, you will have to pay inheritance tax on it at various points in the trust’s lifetime.
This could be when you add assets to the trust, upon the 10-year anniversary of the creation of the trust, when you remove assets from the trust when the trust ends, and when the settlor passes away (if they have made a will trust). Inheritance tax is payable on “relevant property”, which is most property and can include money, shares, houses, or land.
For more information on inheritance tax planning, visit our blog here.
How to end a trust?
There are several ways in which a trust can end including the beneficiary coming of age, the beneficiary passing away, or as a result of a trustee-made decision.
Often, the trust arrangement ends when the trustee transfers the assets to the beneficiary directly.
How can Britton and Time Solicitors help?
If you are a trustee, contact us today. Our expert solicitors can help you decide if you:
- Have carried out the purpose of your trust by ending it
- Have kept suitable records of your actions
- Have reported and paid any tax owed
- Have given the assets in the trust to the beneficiaries
Along with any other trust-related queries.
To arrange your initial consultation with one of our solicitors, simply call us on 020 3007 5500.
very insightful