When it comes to planning for your future, it's crucial to be proactive. Trusts are essential tools in this regard, allowing you to make the most of tax reliefs on your estate and distribute assets in the way you desire. In the following guide, we outline the usefulness of trusts and why it might be a good idea for you to consider incorporating one into your succession plan.
A trust - sometimes referred to as a 'Trust Fund' - is a legal arrangement where one party (the settlor or donor) transfers assets to another party (the trustee or trustees) to hold and manage for the benefit of a third party (the beneficiary or beneficiaries).
Trusts come in various forms, such as discretionary trusts, bare trusts and life interest trusts, each serving different purposes.
There are many benefits to setting up a trust, and for many people, they represent a key part of the estate planning process. However, it’s important to note that trusts will bring different benefits depending on the type of trust you choose to set up and your unique circumstances.
When it comes to trusts, one size doesn't fit all. The type of trust you choose will depend on your specific needs, objectives and the assets involved. Below are some of the most commonly used types of trusts in the UK:
In a bare trust, assets are held in the name of a trustee but belong outright to the beneficiary for tax purposes, meaning they are ideal for estate plans where the beneficiaries are children. The assets are transferred to them when they reach the age of 18.
The trustees have full discretion over who among the listed beneficiaries will receive income or capital from the trust. This is especially useful for complex family situations or when beneficiaries are under 18, financially unreliable or vulnerable.
A beneficiary (the 'life tenant', in this case) has the right to the income from the life interest trust for their lifetime, but they don't have rights to the underlying capital, which passes to other beneficiaries after their death. Life interest trusts are often used in wills for couples to ensure that the surviving partner is financially secure, while protecting the capital for children or other beneficiaries on the survivor’s death.
A mixed trust blends features of different types of trusts. For instance, a part of the trust could be set up as a discretionary trust, and another part as a life interest trust. This is useful for complex financial or family situations where multiple objectives need to be met.
The settlor retains an interest and may continue to benefit from the assets, which is ideal for individuals who require flexibility in accessing trust assets but want to set aside certain benefits for other beneficiaries. However, there are sometimes adverse tax implications for this type of trust, and care should be taken to ensure these are considered.
Vulnerable beneficiary trust can be customised to offer additional protections and financial security for beneficiaries who are vulnerable due to age, illness or disability. These are best suited for individuals who are unable to manage their finances due to mental or physical incapacity.
Established to hold shares in a company for the benefit of its employees, companies looking to give employees a stake in the business can align interests and potentially improve productivity.
Each type of trust serves different purposes and comes with its own set of rules, advantages and disadvantages. The key to successful trust planning is choosing the structure that best suits your individual needs and circumstances.
Before making the decision to create a trust, you should understand how a trust can be beneficial for people in different situations, and what types are most appropriate.
Setting up a trust can be a complex process that involves careful planning and consideration. Below is a general look at the steps involved:
Before you set up a trust, it's crucial to consult with a legal advisor experienced in trusts, tax and succession planning - such as those at JMW. Your solicitor can provide you with tailored advice on the type of trust that is most suitable for your circumstances.
Understanding the legal implications of setting up a trust is essential. This includes the obligations of the trustees and the rights of the beneficiaries.
Make a comprehensive list of all your assets. This can include property, investments and personal items. Some assets may require a formal valuation, especially if they have tax implications. A solicitor will be able to help you to facilitate this.
You should also consider the liquidity of your assets. Some assets, such as money, may be easier to transfer into a trust than others, such as business shares or a house.
Being a trustee is a responsible role that involves managing assets on behalf of the beneficiaries. Choose trustees who have the necessary skills to manage the assets involved. This can range from financial experience or qualifications to specific knowledge relevant to the trust.
It should go without saying that the trustees should be individuals you can completely trust. Have a backup plan or additional trustees in case a trustee is unable or unwilling to serve.
JMW can act as a professional trustee to assist and guide your chosen trustees.
The trust deed will also be accompanied by a letter of wishes - a side letter addressed to the trustees of the trust. It provides guidance on how the settlor of the trust would like the funds to be managed and distributed from time to time.
Given that life circumstances change, the letter of wishes should be periodically reviewed and updated if necessary.
By paying close attention to these steps and seeking expert legal advice, you can ensure that your trust serves its intended purpose effectively. This attention to detail can safeguard against misunderstandings and disputes in the future. After all, the goal of setting up a trust is to provide financial security and peace of mind for you and your loved ones.
With JMW Solicitors, you have a partner experienced in all nuances of setting up and managing trusts. We can guide you through every step of the process, ensuring your trust is both legally robust and tailored to your individual estate planning needs. For more advice on trusts, call us today on 0345 872 6666, or fill out an online contact form to arrange a time for us to call you back.
