Why You Should Use a Trust

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Why You Should Use a Trust

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.

The Basics of Trusts

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.

Benefits of Using a Trust

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.

  • Tax efficiency: one of the primary advantages of using a trust is its potential for tax efficiency. A well-structured trust can help mitigate the impact of Inheritance Tax (IHT) and may offer favourable conditions for Capital Gains Tax. Trusts can also serve as a powerful vehicle for income tax planning. A trust can help you to reduce the size of your taxable estate, enabling you to save money and improve your beneficiaries' inheritance.
  • Control and protection: trusts offer a robust mechanism for safeguarding your assets. Whether you’re concerned about creditors or wish to ensure that funds are distributed under certain conditions, a trust offers the control and protection you need to pass wealth to the next generation. They can also be instrumental in protecting assets in situations like family disputes or divorces.
  • Flexibility: trusts offer the flexibility to adapt to changing circumstances. Trustees play a vital role here, managing the assets in line with the trust's terms and conditions.
  • Confidentiality: unlike wills, which become part of the public record, trusts can usually remain a private family arrangement. This confidentiality can be particularly appealing to many people.

What Are the Different Types of Trusts?

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:

Bare Trusts

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.

Discretionary Trusts

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.

Life Interest Trusts (Interest in Possession Trusts)

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.

Mixed Trusts

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.

Settlor-Interested Trusts

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 Trusts

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.

Employee Benefit Trusts (Employee Ownership Trusts)

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.

Who Are Trusts For?

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.

  • Parents and grandparents: trusts can be invaluable for securing the financial future of children or grandchildren. Educational trusts, for instance, can be set up to finance schooling or higher education.
  • Business owners: for those who own businesses, trusts like employee shareholder trusts can be utilised. Trusts can also safeguard business assets for future generations.
  • Couples: life interest trusts in wills are often suitable for couples, ensuring that the surviving partner can continue to benefit from assets while preserving them for future generations. For blended families, a discretionary trust on second death may be the best option.
  • Vulnerable individuals: trusts can be customised to care for individuals with special needs or vulnerabilities. Vulnerable beneficiary trusts are tailored to offer additional protections and financial security.
  • High-net-worth individuals: for those with significant assets, trusts can serve as part of a broader wealth management strategy. Family investment companies are an example of how trusts can be utilised as part of a wider, more complex succession plan.

Practical Steps for Setting Up a Trust

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.

2. Assess the Value and Type of Assets

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.

3. Choose Appropriate Trustees

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.

4. Outline the Terms of the Trust

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.

Talk to Us

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.