What is a “Trust” in Estate Planning?

14th June 2022 Wills, Trusts & Estate Planning

 

A trust is a legal arrangement where a body of people holds and manages assets on behalf of another person or body of people. A trust will have a beneficiary or beneficiaries, who is/are the person/s the trust was made for. In this blog post, we answer the questions: “what is a trust in estate planning?”.

What is a trust?

A trust is a legal arrangement where you can give assets (money, possessions, and property) to another person or persons to look after to benefit a third person. When making a trust for estate planning purposes, there are several roles that you need to understand:

  1. The settlor - the person who creates the trust
  2. The beneficiary - the person/people that the trust is made for and the assets of the trust are held within the trust for the beneficiary’s benefit
  3. The trustee - the person who is responsible for the assets of the trust. This person is granted ownership of the trust assets, which includes buying, selling and investing them

When assets are put into a trust, this means you no longer own them.]

Who can a trust in estate planning do?

When you set up a trust, you can choose the rules. The trust agreement will state what happens with any cash, property, or investments in the trust. A trustee has a legal obligation to care for and manage your estate on behalf of the beneficiaries.

A trust is beneficial if you want to leave assets to a beneficiary until they reach adulthood. For example, you may want your children to have access once they are sufficiently mature to manage the assets themselves. It can also help to reduce your Inheritance Tax bill, although the law in this area is complex and you should always seek professional advice.

What is Inheritance Tax?

Inheritance Tax is a tax against your estate once you have died. You will not have to pay this if the value of your estate is below £325,000, or you leave everything above this threshold to a spouse, civil partner, charity, or community amateur sports club.

You can find out more about valuing your estate for Inheritance Tax and reporting its value on the government website.

There are further complex rules that count assets in certain types of trust, or which have been iven away before death, towards the £325,000 threshold. There are also additional exemptions that apply to your family home, business or agricultural assets, or woodland.

The different types of trusts in estate planning

There are many different types of trust, meaning you need professional advice as to which structure is appropriate. Basic trusts will have minimal costs, whereas a more complex trust may be more expensive. If you are setting up a trust, you should speak to a solicitor to get advice on how to do this and the associated tax consequences.

Below are some of the most common trust structures in estate planning:

Discretionary trust

This trust means that the trustees have the final say in how the assets subjected to the trust are distributed to the beneficiaries you have named in the trust. This trust is very common as it proves protection to prevent beneficiaries inheriting money too quickly, or at an inappropriate time, and can provide a degree of tax mitigation.

Bare trust

This is the easiest and simplest trust. Any beneficiaries will be able to gain access to the assets within the trust once they reach the legal age of 18 in England and Wales. The beneficiary must also be deemed mentally capable, meaning this is not correct trust for a vulnerable person.

“Interest in possession” or “life interest” trust

As stated in the name, the beneficiary is entitled to income arising from the investments in this type of trust, or to live in property held by the trust but they cannot access the property, investments, or cash that are generating income without the authority of the trustees.

Vulnerable person trust

A trust for a bereaved child (i.e. one created under the will or intestacy of a deceased parent) or disabled erson can get special tax treatment. If the only beneficiary is a vulnerable person, they usually pay less tax.

Talk to Us

If you would like to speak to a solicitor about setting up a trust, get in touch with JMW today by calling 0345 872 6666, or fill in our online enquiry form to request a call back. For more information on trusts, visit our dedicated page
 

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