What is a Trust and how does it work?

What is a Trust and how does it work?

Abstract image of hands supporting an outline of a house with model people in it and a heart describing what is a Trust

Generally, Trusts are legal arrangements made by people to manage their assets and are commonly used in estate and Inheritance Tax (IHT) planning. The essential element to remember is that once assets are put into a Trust, the owner of those assets no longer personally owns them. The Trust becomes the owner of the assets and the Trustees who manage the Trust make decisions about those assets. In this article, we hope to explain what is a Trust and how it works.

Why would someone use a Trust?

You might want to consider placing some of your assets into a Trust for a variety of reasons. Some of these reasons might be:

  • To create a fund for your children until they are old enough for them to be handed over to them;
  • To provide for vulnerable or incapacitated members of the family;
  • Passing assets efficiently to the next generation;
  • Depending on certain circumstances can potentially protect assets should long-term care be required;
  • Sheltering assets from claims on divorce or bankruptcy;
  • As a means of defeating claims from estranged children;
  • To pass money down through the generations.

These are just some examples of when Trusts are used. Once assets have been transferred into a Trust, they no longer belong to the person setting up the Trust.

How is a Trust created?

When you want to create a Trust, you need to decide who should be the Trustees. The Trustees are the people who make decisions and deal with the administration of the Trust.

The person who sets up the trust is the settlor and is typically a trustee (meaning that control of the asset(s) is still retained) and the Trust must contain details of the beneficiaries. The beneficiaries are those who will benefit from the Trust.

All Trusts must have a purpose or purposes. That means they must say what their aims and objectives are and what powers the trustees have and/or any discretion you may decide to give them.

What are the benefits of a Trust?

The types of benefits will depend on the type of Trust. For instance, if you set up a Trust to protect family wealth for future generations, you would transfer sufficient assets into the Trust to ensure it can provide for family members in the years to come. This type of Trust may include limits on what each beneficiary receives each year or when they will receive a share of the capital of the trust.

You can also place your home in trust (whilst retaining full control) which potentially can ensure it stays in the family whatever happens in the future-for example should one of your children get a divorce or be made bankrupt, any trust assets will not form part of any settlement.

Another type of Trust might be created for an incapacitated person who is unable to manage their own affairs. The trustees will manage the funds in the Trust for the benefit of the incapacitated individual and can also preserve means-tested benefits.

You might decide to create a Trust to help reduce your exposure to Inheritance Tax or to reduce the reliance on the Confirmation process in Scotland. Confirmation (Probate in England) is needed before someone’s estate can be dealt with after their death. When the assets are in a Trust, they no longer form part of the individual’s estate.

In addition, if you transfer assets into a Trust and survive for at least seven years, in certain circumstances, those assets will no longer be subject to Inheritance Tax when you die. There are rules around this that must be carefully observed.

What are the next steps if you are considering creating a Trust?

We are happy to provide you with information and advice about creating a Trust. In certain circumstances where the Trust requirements are complex, we can refer you to a specialist solicitor who deals with Trusts. You are also likely to need financial advice.

If you wish to discuss what is a Trust, how to set one up or wish to discuss your options, you can make an appointment with Stacey Parker by calling her on 01383 629720 or by emailing Stacey.

Ask a question