Trusts can be an effective planning tool that can be used throughout life’s progression, however there is often a lot of confusion and misunderstanding about the purposes of Trusts, so we thought it would be useful to explain what they are and some of the reasons to use them.

What is a Trust?

A trust is a legal arrangement that gives a trustee the right to hold property or assets for the benefit of a beneficiary or beneficiaries. The purpose of a trust is to provide legal protection for assets such as property, land, investments, business interests and life assurance policies.

A trust is a separate legal entity (like a company) which usually involves several roles. The “Settlor” is the person who sets up the Trust and gives the assets away. The “Trustees” are the legal owners who manage and administer the Trust per its terms, which are usually set out in a Trust Deed. The “Beneficiaries” are the people who will benefit from the Trust.

A trust can also specify how and when assets are distributed and allow more control over the beneficiaries’ use of the assets. Trusts can be used in addition to a will to direct assets after death, and offer benefits such as minimising taxes and protecting assets. Trusts can also enable control over how assets are disbursed, which is important if the beneficiary is a child or family member who may not handle money well.

There are many different types of trusts, and the most appropriate trust will depend on what you want the trust for and will often be determined by the beneficiaries circumstances or tax.

Reasons to set up a Trust

Asset Protection

The main reason for creating a Trust is to protect assets. Rather than giving assets or funds to an intended Beneficiary or Beneficiaries outright, it is often better to place the funds into Trust in the event of a change of circumstances for that individual. Placing assets in certain types of trusts can protect them from creditors, marriage breakdown, care fees or from those who might influence beneficiaries.

Tax Planning

Any assets transferred to a Trust will fall out of the estate for tax purposes if you survive seven years. The added advantage is that even though assets are given away, control of them can still be retained by being named as a Trustee.

Family Wealth Planning

A Trust allows you to pass assets down your family’s generations without creating an inheritance tax liability in your own children’s estates. If you give your children assets outright, you might also be giving them an inheritance tax liability. A Trust allows you to retain assets for children or grandchildren if it would be more tax efficient to pass them to grandchildren when they are older without the assets passing via your children’s estate for tax purposes.

It may be tempting to transfer everything into Trust, but looking at the reasons and tax consequences before doing so is extremely important. As always, we suggest seeking professional advice.

Trust Registration

Since September 2022, the majority of Trusts now need to be registered irrespective of whether the trust needs to pay UK taxes. If you have set up a Trust in the past or have been appointed as a Trustee, then it is important to check the Trust has been registered. For further information please visit www.gov.uk or speak to your solicitor or financial planner.

September 2023