Trusts

A trust is a legal arrangement under which assets are held by one person, or a group of people, for the benefit of someone else. The person creating the trust is usually known as the settlor, the people responsible for holding and managing the assets are the trustees, and the people who may benefit are the beneficiaries.

This separation between legal ownership and beneficial entitlement is one of the main reasons trusts can be so useful as it allows assets to be managed in a more controlled way, rather than passing outright to a beneficiary with no restrictions or safeguards. In some cases, a letter of wishes may also be used alongside the trust documentation to give trustees guidance on how their discretion should be exercised.

Trusts are used for a range of reasons, and they are not only for very large estates. In many cases, they are used because an outright gift would not give enough protection or flexibility.

A trust may be helpful where you want to:

• provide for children or younger beneficiaries in a more controlled way
• protect assets for a vulnerable beneficiary
• preserve means-tested benefit entitlement in appropriate cases
• reduce the risk of inherited assets being lost through divorce, bankruptcy or poor financial decision-making
• allow one person to benefit during their lifetime while preserving capital for others later on
• protect family assets and provide a clearer structure for the future

For many clients, the key point is control and a trust can make it easier to decide how assets should be managed, when they should be used, and who should benefit from them.

One of the most common reasons for setting up a trust is to protect a beneficiary who may not be in the best position to manage money or property themselves. That could include a child, a young adult, someone with a disability, or a person whose circumstances mean that receiving funds outright may not be in their best interests.

In some situations, a direct inheritance can also affect a person’s entitlement to means-tested benefits. A properly structured trust may help avoid that difficulty while still allowing support to be given when needed. The right trust will vary depending on the circumstances, which is why tailored advice is especially important.

There are several different types of trust, and the right one will depend on what you are trying to achieve.

• Bare trust: one of the simplest forms of trust. The assets are held by trustees, but the beneficiary has an absolute right to them, usually once they reach adulthood.
• Discretionary trust: gives trustees flexibility over when and how beneficiaries receive income or capital. This can be particularly useful where protection and flexibility are important, for example where beneficiaries are vulnerable or where there is concern about assets passing outright.
• Life interest trust: sometimes called an interest in possession trust, allows one person to benefit from income or use of an asset during their lifetime, while preserving the underlying capital for another beneficiary later on. This can be useful in family arrangements where you want to support one person without losing control of the final destination of the asset.

Other structures may also be appropriate in certain circumstances, including trusts for children, personal injury trusts and trusts created through a Will.

The choice of trustee is an important part of any trust arrangement. Trustees are responsible for managing the trust assets and acting in the interests of the beneficiaries, so the role is onerous and carries real legal and practical responsibility.

Depending on the trust, trustees may need to make decisions about investments, income distributions, tax, record keeping and compliance. In some cases, family members may be appropriate trustees. In others, a professional trustee or trust corporation may be more suitable.

A trust is not something that is simply put in place and then forgotten about. Trustees may have continuing duties to manage assets properly, keep records, review decisions and comply with tax and registration requirements.

Depending on the type of trust and the assets involved, this may include registration with HMRC’s Trust Registration Service, tax reporting, investment reviews and keeping proper records of trustee decisions. That is one reason why good drafting at the outset matters and why trusts should be periodically reviewed.

Trusts can play a role in tax planning, but they should never be approached as a simple shortcut. Different trusts are taxed in different ways, and some trust arrangements can give rise to ongoing tax charges, reporting obligations or inheritance tax consequences.

For that reason, it is important to understand the wider picture before a trust is created. Advice should take into account not just the immediate aim of the trust, but also the likely tax treatment, the nature of the assets and whether the arrangement will remain suitable over time. TLW’s Trusts team works closely with specialist tax professionals to ensure that you understand the implications and options available to you when considering a trust.

Some clients ask whether a trust can protect the family home or other assets from being used to fund residential care, and this can be a sensitive and complex area: while some trust arrangements may form part of wider planning, transfers intended primarily to avoid care fees can be challenged.

That means advice in this area needs to be careful and realistic and any planning should be based on proper legal advice, rather than on assumptions that a trust will automatically protect assets from future local authority assessment.