INTRODUCING TRUSTS
Trusts are very common and play a key role in many aspects of everyday life. Many people, often without realising it; will come into contact with a trust in one form or another at some point during their lives. Yet trusts are widely misunderstood and often seen as something just the wealthy need to be concerned with.
But trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages. This; coupled with the growing frequency of marriage breakdowns, an ageing population and rising prosperity; makes trusts an excellent tool for long-term planning to ensure a family’s financial stability and security.
01 What is a Trust?
A trust is a legal relationship whereby a person (known as the Settlor) gives property to another (the trustee) to hold assets such as property, shares or cash (the trust fund) for the benefit of someone else or a group of people (the beneficiary or beneficiaries). The details are set out in a document (the Trust Instrument), which could be a Will or a Trust Deed. A Trust can take effect during the lifetime of the Settlor or shortly after the death of the Settlor.
02 Why might I need a Trust?
Trusts vs Outright Gifts
Trusts continue to provide practical solutions to problems in ordinary people’s lives as opposed to giving the beneficiary an outright gift. The beneficiary of a gift will own the asset outright and it will form part of their estate. This means it could be taken into account in the event of any future divorce, bankruptcy or insolvency process and may be lost to creditors or former spouses. There are also other, more common, financial pressures. The beneficiary may become unemployed, or could be forced to take a pay cut or they may fall ill. As a consequence, this might make them feel pressured to sell the assets in order to consolidate debts or to help their financial situation.
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Vulnerable Individuals
In addition, the recipient of the gift may be unable to manage their affairs due to an illness or disability and so a trust is a way to provide for vulnerable loved ones who are unlikely to be able to look after their own affairs. Some beneficiaries can be easily influenced by family members or friends who may not always have their best intentions in mind. In addition, addictions such as drink, drugs or gambling can also lead to a beneficiary making unwise decisions in relation to their gift. If the beneficiary is in receipt of means-tested benefits, those benefits could be reduced or stopped as a result of receiving the gift. Trusts can be used to protect vulnerable persons as well as to protect the inheritance of young children until they are old enough to take responsibility for their own affairs, whilst also ensuring that funds can be made available to cater to their needs during their upbringing, such as funding their education.
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Sideways Disinheritance
A trust allows you to provide for your spouse or partner whilst protecting the interests of any children. This can be particularly important for families where there are children from previous marriages and to protect your assets in the event of your spouse or partner meeting someone else after you die. For example, if a beneficiary dies, an asset that has been given to them outright may pass by Will or by the Rules of Intestacy (where a person dies without a Will), to their spouse who may go on to meet a new partner and remarry. On their death, this asset could then pass onto their new spouse or step-family, resulting in the asset ultimately benefitting a completely different family with your own children or family missing out.
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Tax Implications
Some people expect that gifting an asset outright will remove the asset from their estate and will therefore have the effect of reducing their estate for Inheritance Tax purposes. However, this is not always the case. There can be other tax considerations as well, such as the triggering of a Capital Gains Tax charge. Tax implications can be complex, and it is important that advice is sought before any gifts are made.
03 How flexible is a Trust?
A trust allows the settlor to indicate how they wish the trust fund to be used and who should benefit but can leave it to the trustees to decide over time who should benefit, when and how. The settlor can leave a letter of wishes for the trustees to express their wishes in further detail or leave the decisions to the trustees discretion. This type of trust also enables people to benefit, who are not even born yet – such as future grandchildren.
Including a Trust in your Will
There are different types of Will Trusts, each with their own specific purposes and benefits. For example, a Discretionary Will Trust gives the trustee the discretion to decide how and when to distribute the assets to the beneficiaries, while a Life Interest Will Trust provides a beneficiary with a right to the income generated by the trust assets or to live in a property for the rest of their life, with the assets then passing to other beneficiaries upon their death. The creation of a Will Trust should only be done after careful consideration and consultation with a qualified Estate Planner, such as Toucan Law.