A basic guide to trusts
Trusts offer a means of holding and managing money or property for people who may not be ready or able
to manage it for themselves. Used in conjunction with a will, they can also help ensure that your assets
are passed on in accordance with your wishes after you die. Here we take a look at the main types of
UK family trust.
- What is a trust?
- A trust is an obligation binding a person called a trustee to deal with property in a
particular way for the benefit of one or more 'beneficiaries'.
- Who is a settlor?
- The settlor creates the trust and puts property into it at the start, often adding more
later. The settlor says in the trust deed how the trust's property and income should be used.
- Who is the trustee?
- Trustees are the 'legal owners' of the trust property and must deal with it in the way
set out in the trust deed. They also administer the trust. There can be one or more trustees.
- Who is the beneficiary?
- This is anyone who benefits from the property held in the trust. The trust deed may name
the beneficiaries individually or define a class of beneficiary, such as the settlor's family.
- What is trust property?
- This is the property (or 'capital') that is put into the trust by the settlor. It can
be anything, including:
- Land or buildings
- Investments
- Money
- Antiques or other valuable property
- When might a trust be created?
- A trust might be created in various circumstances:
- When someone's too young to handle their affairs
- When someone can't handle their affairs because they're incapacitated
- To pass on money or property while you're still alive
- Under the terms of a will
- When someone dies without leaving a will (England and Wales only)
- What are the main types of private UK trust?
- There are many types of private UK trusts, but the main ones are:
- Bare trust
- In a bare trust the property is held in the trustee's name - but the beneficiary can
take actual possession of both the income and trust property whenever they want. You might, for example,
use this type of trust to pass gifts to children while you're still alive.
- Interest in possession trust
- In an interest in possession trust the beneficiary has a legal right to all the trust's
income (after expenses), but not to the property.
- You can, for example, set up an interest in possession trust in your will. You might
then leave the income from the trust property to your partner for life and the trust property itself
to your children when your partner dies.
- Discretionary trust
- The trustees of a discretionary trust decide how much income or capital, if any, to
pay to each of the beneficiaries - but none has an automatic right to either. You can use a discretionary
trust as a way to pass on property while you're still alive and still keep some control over it through
the terms of the trust deed.
- Accumulation and maintenance trust
- An accumulation and maintenance trust is used to provide money to look after children
during the age of minority. Any income that isn't spent is added to the trust property, all of which
later passes to the children.
- In England and Wales the beneficiaries become entitled to the trust property when they
reach the age of 18. At that point the trust turns into an 'interest in possession' trust. The position
is different in Scotland, as, once a beneficiary reaches the age of 16, he could require the trustees
to hand over the trust property.
- Mixed trust
- A mixed trust may come about when one beneficiary of an accumulation and maintenance
trust reaches 18 and others are still minors. Part of the trust then becomes an interest in possession
trust.
- Is tax payable on the income from UK trusts?
- Trusts are taxed as entities in their own right. The beneficiaries pay tax separately
on income they receive from the trust - at their usual tax rates, after allowances.
- How about taxation of property settled on trusts?
- How a particular type of trust is charged to tax will depend upon the nature of that
trust and how it falls within the taxing legislation. For example a charge to Inheritance Tax may arise
when putting property into some trusts, and on other chargeable occasions for instance when further
property is added to the trust, on distributions of capital from the trust, or on the ten yearly anniversary
of the trust.
- How do I go about setting up a trust?
- Trusts are very complicated, and you may have to pay Inheritance Tax and/or Capital Gains
Tax when putting property into the trust. If you want to create a trust you should seek advice from
a solicitor, who can also draw up the trust deed and give you advice on related legal and taxation matters.
It's also advisable to speak to a tax adviser or accountant before agreeing to be a trustee.
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