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What is a Trust?



 

Trusts are more common than you may actually think. Many people have asked me about setting up a trust or have contacted me to say that they are a beneficiary of a trust and they are uncertain of what that means?

 

A Trust creates a legal obligation on a set of trustees to deal with the property of the trust for the benefit of the beneficiaries. The legal ownership of any asset in the trust has dual ownership – the legal owner (the trust) and the beneficial owner (the beneficiary).


A Trust is set up when someone (a settlor) decides to move an asset(s) into a trust for the benefit of a specific person or a group of people (beneficiaries). A trust will then be operated by trustees for the benefit only of the beneficiaries. This is a legal duty for the trustees, hence any mis-handling of a trust can lead to prosecution of a trustee.




 

There are different types of trusts:

Income in Possession Trust – the beneficiary is entitled to all the income of the trust but not the capital asset itself. These are usually created on death, when the Will of the deceased leaves their estate or residue of estate in trust for a partner. Upon the partner’s death the assets will then either pass to other family members or be part of their partner’s estate. This is quite often the planning used for unmarried couples to ensure that the surviving partner can remain in the family home until they pass away.

 

Discretionary Trust – the income and assets of the trust can be passed to the beneficiaries at the discretion of the trustees. For instance, where a grandparent wants to give investments to their grandchildren, they can set up a discretionary trust for a class of beneficiaries (their grandchildren, either current or future), and they can issue income to any of the grandchildren at their discretion. Note however, that if the parents set up the trust as the settlors then there are tax issues and generally this is not recommended, tax advice should be sought on this.

A discretionary trust is most commonly used to a) pass on assets out of an estate for IHT purposes and b) to protect the asset in the trust from being misused by the beneficiaries. If, for instance, you held property that you wanted to pass onto your blood family only, and not be affected by divorce or other family disagreements then it can be held in a discretionary trust.

 

Bare Trust –assets are held by a nominee for the beneficiary. The nominee acts on the beneficiaries wishes. The beneficiary is absolutely entitled to the income and asset.

The most common bare trusts are where children’s bank accounts are opened, and a parent is the nominee and holds the property for the child until they become an adult (18) and are entitled to the income and capital absolutely.

 

Bereaved Minor’s Trust –a trust created through either intestacy or via a deceased parent. The income and the assets are held for the child until they reach the age of 18 and then pass to them absolutely.  

 

Trusts for Vulnerable Beneficiaries – this is a trust for a relevant minor (under 18 with one parent deceased) or a disabled person.  A trust is only a vulnerable beneficiary trust if both the trustees and the beneficiary make an annual declaration in the trust's tax return.

 

Each of these trusts have different tax treatments, from both a set up basis for inheritance tax and capital gains tax along the way. Additionally, there are different ways of treating ongoing income and capital gains tax on the trust annually. It really is vitally important to seek tax advice if you want to set up a trust or you become a beneficiary and would like to know about how you will get income/assets from the trust.





Trusts are required to be registered with HMRC; this applies even if they are not a taxable trust. Registering a trust with HMRC is not the same as registering a trust for tax with HMRC.

It should be noted that Settlors of a trust can be a trustee, but it is tax inefficient; hence it is not recommended, that the Settlor or their partner is a beneficiary of a trust. If the children are beneficiaries of the trust then there are also tax consequences if the Settlor of the trust is one of their parents.

 

If you would like to know more about trusts then please get in touch for a conversation, and we can provide further advice on your specific enquiry following our initial contact.

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