Trusts can be a useful tool when it comes to managing your assets and planning for the future. But what exactly is a trust, and how do you know if you need one?
What is a Trust?
As the Law Society explains, a trust is a legal arrangement where “assets are held and managed by one person or people (the trustee) to benefit another person or people (the beneficiary). The person providing the assets is called the settlor” (https://www.lawsociety.org.uk/public/for-public-visitors/common-legal-issues/trusts).
Trusts can hold money, land, shares, or other valuable assets, and they can come into effect during your lifetime or after you pass away, depending on how they are set up.
Why use a Trust?
There are several reasons why someone might set up a trust, including:
- To protect or preserve assets for children or vulnerable beneficiaries
- To control when and how money is distributed (e.g. at a certain age or for specific purposes)
- To reduce inheritance tax liability in some cases
Common types of Trusts in English Law
i) Bare Trusts
Assets are held for a beneficiary who has an absolute right to them. Bare trusts are often used for minors who can access the trust assets when they turn 18.
ii) Interest in Possession Trusts (including Life Interest Trusts)
Briefly, these types of trusts give a beneficiary the right to benefit from the trust asset (e.g. receive any rent or dividends) for a set period of time. At the end of this period, a different beneficiary becomes entitled to the asset itself (e.g. the property or shares).
A life interest trust is a type of interest in possession trust commonly incorporated in wills. Life interest trusts are often arranged so that the initial beneficiary is given the right to live in a trust property for the remainder of their life but, when that beneficiary dies, the property passes to a second beneficiary, who will become entitled to the property outright.
iii) Discretionary Trusts
Trustees have flexibility over how and when to distribute income or assets. These can be useful for families with changing needs or where beneficiaries may not be financially responsible.
When should you consider setting one up?
You might want to consider a trust if you:
- Want to provide for young children or vulnerable adults
- Have complex family circumstances (e.g. second marriages)
- Are concerned about future care fees
- Own significant assets or business interests
- Wish to manage how an inheritance is used
Get the right advice
Setting up a trust comes with legal and tax implications and the best option heavily depends on your personal circumstances. A Personal Legal Services solicitor can help you choose the right type of trust and ensure it is set up and managed properly. If you would like assistance, please contact the W Davies Personal Legal Services Department.
