A trust is a means by which assets are held and managed by one or more persons, known as ‘Trustees’, for the benefit of others, known as ‘Beneficiaries’.  The person who sets up a trust is known as ‘the Settlor’.

A trust can be established either during lifetime or via a Will.  Although a trust can simply be an agreement between two people, it is preferable to have a legal document in place, a ‘Trust Deed’, so that it is clear what is intended.

Setting up a trust can be more effective than making an outright gift because control of an outright gift is lost once it has been given away.

People set up trusts for many reasons, including:

• For children
• To control a gift
• To protect in the event of illness or disability
• For personal injury compensation
• For residential care purposes
• To protect life insurance
• To safeguard Inheritance
• For Tax reasons

There are many types of trust fund designed for specific situations, but common types are:

• Bare trusts: These types of trusts are often used for trustees to hold assets for a child until they reach the age of majority.
• Life interest trusts: These trusts are also known as ‘interest in possession trusts’ and allow a ‘life tenant’ to receive income only, whilst capital is preserved for others after the death of the life tenant. If set up in a will, these are referred to as Immediate Post Death Interest Trusts.
• Discretionary trusts: These trusts work in such a way so as to ensure that none of the beneficiaries have a fixed right to any particular share of the trust fund, but the trustees have discretion as to which beneficiary should benefit, when, and to what extent.

With limited exceptions, legislation introduced by the Finance Act 2006, made most trusts subject to the inheritance tax regime, known as Relevant Property Trusts.

Trustees

Trustees are initially elected by the Settlor when the trust is established.  Trustees will look after the money and other assets which go into the trust and invest it as appropriate.  The Settlor can elect between one and four trustees, although it is recommended that at least two trustees are appointed.  Trustees have a wide range of powers and therefore it is important that the Settlor elects persons who will act in the best interests of the beneficiaries of the trust.

Trustees also deal with making distributions from the trust at the appropriate time(s), and if the trust is discretionary in nature, then it is the trustees that decide if and when to pay out money and for whose benefit.

Trustees must keep the trust funds separate from their own assets/funds and trustees have a duty to take proper financial advice before investing money on behalf of the trust.

One of the paramount duties of the trustees is to keep records of all their decisions and transactions pertaining to the trust and to prepare trust accounts (usually annually).  Trustees can instruct a professional such as an accountant or solicitor to deal with the tax return and prepare accounts for the trust.  This is likely to assist the trustees if there is trust income tax and/or capital gains tax to be paid over to HM Revenue and Customs.  Such professional assistance can be paid for out of the trust fund.

Beneficiaries

Beneficiaries are persons with an interest in the trust; that is the person or persons that will receive the funds in the future or who could potentially receive something from the trust during the trust’s lifetime.

Beneficiaries may be named and identified in the trust deed or described by reference to a class of beneficiaries (such as grandchildren), or in the case of discretionary trusts, left to the trustees’ discretion.

Beneficiaries have an equitable ownership interest in the trust property but they have no authority to influence how the trust is administered by the trustees.

There is no maximum number of beneficiaries permitted but if the trust is discretionary in nature then there should be a minimum of at least two beneficiaries.

Tax

Depending on the type of trust created and the value of the assets transferred, the trust may need to be registered with HM Revenue & Customs for income tax and inheritance tax purposes, and inheritance tax paid.  This can be on creation and/or during the lifetime of the trust.

It is the responsibility of the trustees to deal with the tax affairs of the trust and if the trust is eligible to pay tax, trust tax returns must be filed annually by 5^th October of the tax year after the trust is set up (or when it starts generating income or chargeable gains, if later).  The tax year is from 6^th April to 5^th April thereafter.  As the trust is a separate legal entity, it will have its own unique Taxpayer Reference assigned to it.

We have experience in dealing with the necessary legal procedures involved in creating and administering trusts.  We offer friendly, efficient and effective legal advice through the process.