In its simplest form, a trust is an agreement between two or more people regarding the care and distribution of property. Property is “put in to trust” by a person known as the settlor. The property is then cared for or managed by one or more trustees. At a defined end point, or at various points during the life of the trust, the property is distributed to one or more beneficiaries.
Let’s take a simple example:
Suppose Joe gives Bill a pound to go to the shop to buy a pint of milk and bring it back to Mary to make coffee with. A simple trust has been formed here. Joe is the settlor. Bill is the Trustee. Mary is the beneficiary. The pound is the property that has been put in trust. The end point of the trust has been defined as the time when Mary receives the milk.
When a trust is formed, the settlor can empower the trustees with various freedoms and can establish restrictions to those freedoms. In our milk example, Joe might say that Bill must buy full-fat milk, and if there is no full fat, to buy semi skimmed,
but not to buy skimmed milk. He may give Bill the option to keep the change, or to put the change in the charity box at the shop.
As you can see, a trust is therefore an agreement.
Trusts are formed for many reasons. Some examples relevant to the subject of Wills and family protection, would be:
Children receiving money whilst below adult age
(Example: The parent as settlor says that if he or she passes away, leaving children under the age of 18, the children’s uncle is to be the trustee and care for the money until they are 18, but can use it for their education or welfare before that time)
Money put in to trust for the benefit of a disabled person
(Example: A parent as settlor says that if he or she passes away whilst still being the legal guardian of the disabled person, their sister shall become the trustee of a certain amount of money which is for the sole benefit of the care of the disabled person)
(Example: The owner of a company as settlor says that if he or she passes away whilst still having ownership and management of a company, that the company shall be put into trust and run by his business partner. The trustee should sell the company and give the proceeds of sale to the settlor’s spouse)
Family Asset Protection Trust
(Example: A couple own a property but very little other assets. They want to protect the property in order to keep it in the family and ensure that this primary asset does not end up going to in-laws, solicitors to pay probate fees, care fee costs, future family problems, criminal elements that target people with assets, etc. They put their property into trust, with themselves and their children as trustees)
When considering putting property in to trust, especially money, land, shares, a business, a house etc. care must be taken to establish the correct terms of the trust in order to give the trustees a level of freedom that is appropriate for the purpose.
To discuss what trusts might be applicable to your own circumstances, or to arrange a free consultation, please contact us by phone or by email.
A trust is an arrangement recognised by law whereby one party holds property for the benefit of another.
What purpose does a trust serve?
A simple example: -
There are numerous uses for trusts, but probably one of the most common is where a parent would leave property in his/her Will on trust for the benefit of a child who is not old enough to inherit (minimum age – 18 years). In such a case the property could be left on trust for a relative or trusted friend to manage until the child is old enough to inherit. During this trust period, ownership of the property vests in the relative/friend who has control over the management of the property in his/her capacity as a trustee. The ultimate ownership will always be the child who is the beneficial owner of the property.
Categories of Trust
Trusts can be categorized in a number of different ways. One way is between the Implied trust and the Express trust as follows:
Sometimes referred to as `Resulting trusts`, implied trusts fall into two sub-categories: -
The Presumptive trust – where the settlor transfers property to the beneficiary on trust but for their benefit The Automatic trust – where there is no expression of intention on the part of the settlor and thus the trust fails, for example where the beneficiary can`t be identified or where the purpose on the implied trust fails.
This is the term given to a trust explicitly created by the settlor by written instruction during life or in a Will. Although there is no legal necessity for a trust to be contained in writing it is clearly preferable as there could be risks attached to a verbal trust in establishing the precise terms of the trust.
Another way in which trusts can be categorized is between the revocable trust and the irrevocable trust as follows: -
As the name implies a revocable trust can be cancelled or amended by the settlor during his/her lifetime. A revocable trust has to be created in the lifetime of the settlor to be a revocable trust (sometimes known as a Living trust or Inter Vivos trust)
Again as the name implies an irrevocable trust cannot be cancelled or changed in any way after its creation. Irrevocable trusts can be created during the lifetime of the settlor or in a Will (sometimes known as a Testamentary trust)
Revocable and Irrevocable trusts are treated differently for tax purposes. The settlor of a revocable trust can relinquish assets into trust for the benefit of the ultimate beneficiary but continue to enjoy the benefit of the assets during their lifetime. As such the settlor is treated as though still the owner of the trust assets and taxed as such.
Yet a further way of categorizing trusts is between Public trusts and Private trusts as follows: -
Sometimes known as charitable trusts this type of trust is essentially for the benefit of the public at large or at least a section thereof. As such the trust cannot be restrictive in its use. For example, land left by the settlor for the benefit of the community could not bar a particular category of residents.
A broad term to cover trusts made in a private as opposed to public capacity. Unlike Public trusts, Private trusts can be restrictive and can select specific beneficiaries.
Types of Trust and their uses
Accumulation and Maintenance Trust – A trust where one or more persons, on or before attaining the specified age of not exceeding 18, become beneficially entitled to the capital and accumulated income of the Trust, in so far as it has not been applied for the maintenance, education and benefit of the beneficiary/beneficiaries.
Bare (Simple) Trust – A Trust in which the settlor relinquishes any interest in the assets of the trust, where the beneficiaries are specifically defined and the trustees have control of the trust with no discretion over the distribution of the trusts assets. For example, this type of trust is ideal for a minor where, under the Will, there is a gift to a beneficiary who is under the age of majority. An infant cannot give a valid receipt for a gift until he/she attains the age of 18 and it may be that the gift will have to be invested during the infancy of the beneficiary for his/her benefit. This type of trust is taxed on the ultimate beneficiary (the minor) and therefore can take advantage of the tax allowances of the minor who is unlikely to have any other source of income
that can take advantage of those allowances.
Child Trust Fund – Set up by the government in the UK in 2002 to encourage parents and grandparents to save for their children/grandchildren in a trust fund until age eighteen. Accounts are available to all those born after 1 September 2002, with the government opening the account with a contribution of £250. Further contributions are encouraged from the parents and grandparents up to a maximum of £1200 per annum up to age eighteen. This is an ideal way to take full advantage of each child`s tax allowances that otherwise may be wasted.
Constructive Trust –A trust not expressly established by the settlor, but one that arises as a legal response to events that occur. The most common example being when a married couple buy a house together as joint tenants. There is an assumption that the property will be held in trust by each spouse for the other. A more complex type of constructive trust arises when there is an illegal financial gain by one party at the expense of another. In such a case the injured party can appeal that the gain made should be placed in a constructive trust for their benefit.
Disabled Persons Discretionary Trust – A discretionary Trust where the disabled person or persons can enjoy the income or capital of the property in trust, at the discretion of the trustees. On the death of the disabled person, the remainder reverts to the ultimate beneficiary.
Discretionary Trust – A trust the terms of which give the trustees the discretion to apply the assets of the trust as they please for the benefit of the beneficiaries
Flexible Life Interest Trust – As the name implies this is a flexible trust created on the death of the first spouse and giving the trustees power to pay any income generated to the surviving spouse as well as power to lend or give capital to the surviving spouse. It also gives powers to the trustees to give capital to the other beneficiaries during the lifetime of the surviving spouse or to convert some or all of the capital of the trust into another trust where this is advantageous.
Home Protection Trust – A trust created during the lifetime of the settler into which is placed the property in which the settler lives. With the passage of ownership the settler, as a beneficiary under the trust, retains an interest in possession throughout his/her life, or until he/she has decided the residence (or its replacement if downsizing) is no longer required or appropriate. Thereafter the property passes to the other beneficiaries.
IHT Nil Rate Band Discretionary Trust with promissory note, loan trust or IOU loan trust - A specialist trust originally incorporated into married couples` Wills to use the current Nil Rate Band IHT Tax allowance applicable at the date of death of the first to die. It was particularly applicable where the joint assets of the marriage or civil partnership exceeded twice the IHT nil rate band. The trust was for the benefit of the family and being within the nil rate band there was no IHT to pay. The remainder of the estate transferred to the spouse and was exempt. The spouse, who would be one of the trustees, could effectively, with the trustees` agreement, borrow from the trust assets in exchange for giving an IOU or permitting a charge over the spouse`s assets. The debt being repaid on second death. Whilst this trust is still `tax efficient` for unmarried couples in an informal partnership, with the introduction of the transferable NRB allowance governing married couples and civil partners in October 2007, the benefit for them is now restricted to where the trust assets are anticipated to have a faster growth rate than the annual increase in the NRB tax allowance.
Incentive Trust – A trust created with rewards/benefits to the beneficiary only on fulfilment of certain conditions. For example, the condition could be that a son continues in the family business or achieves specific academic qualifications. The advantage of such a trust as opposed to some other form of arrangement is that it is contained in a legal document reducing the chance of misunderstanding, and it will/can survive the settlor`s death. In practice however there are a number of drawbacks to such a trust as it is unalterable and could become increasingly irrelevant to current circumstances.
Interest in Possession Trust – A trust created on the death of the testator in which a person (generally the spouse or civil partner) is given a life interest in possession of the deceased`s share of the family home. On the death (or possibly remarriage) of the life tenant the property reverts to the ultimate beneficiaries. This trust is particularly useful where the joint estates of the deceased and surviving spouse or civil partner are below the transferable Nil Rate Band (NRB) threshold.
Lifetime Discretionary Trusts – A trust created during the lifetime of the settlor, into which funds surplus to the settlor`s requirements are transferred. The advantage of such a trust is that it can specify a category of beneficiaries, for example the settlor`s children, grandchildren or after even, after the death of the settlor, the spouse. Furthermore there is the possibility of even finer control through a letter of wishes. Such a trust will ring-fence the trust funds for the beneficiaries against third party claims, bankruptcy claims, divorce settlement claims etc. This trust can also provide efficient tax planning advantages.
Pilot Trust – (sometimes called a feeder trust) - In simple terms a pilot trust is one that is set up during the lifetime of the testator ready to receive property on his/her death by way of a specific legacy in the Will, or by receipt of a death in service benefit or death benefit through a pension. The trust is normally discretionary and has to be created with some monetary value in the trust. This can be accomplished by including as little as £10 (e.g. a ten pound note) in the trust. In the case of a death in service benefit or pension death benefit the proceeds would not fall into the deceased`s estate and by use of the pilot trust could also be kept out of the surviving spouse`s estate, whilst still giving the spouse the possibility of benefiting directly from the trust or being able to borrow funds from the trust during lifetime, with repayment to the trust being made on second death from the second spouse`s estate. Pilot trusts that do not exceed the Nil Rate Band (NRB) for Inheritance Tax (IHT) are very tax efficient as well as being particularly flexible, being able to benefit the whole family without the trust funds becoming subject to IHT if one beneficiary dies. It is possible to specify how the trust is to operate, which could include a letter of wishes from the settlor to the trustees. The funds of a pilot trust are also protected against claims made against the beneficiaries from creditors, ex spouses in a divorce settlements etc.
Precatory Trust - This is a trust that is often used when a testator can’t decide to whom to give money or property to, and states that the property should be used in a particular manner but without imposing any legal obligation. For example, in writing a Will, the testator may leave chattels or a collection of items to one individual expressing the wish that they be distributed fairly by that person among certain others.
Property Trust – A trust normally used by married couples/civil partners where they own their property as Tenants in Common. The trust is constructed so that should they have to go into care in later life through old age, illness or accident then the state via the `Community Care Act` would potentially only be able to lodge a claim against 50% of their property to help pay (fund) care expenses of the residential care home if they had no other way of paying these fees.
Protected Life Interest Trust– Not very common nowadays this trust ensures that the beneficiary does not try to deal with his/her right to income.
Protective Trust – A trust for a period no longer than the beneficiary`s life, the period ending if certain events (commonly including the bankruptcy of the beneficiary) take place. At the occurrence of such an event, the income of the property is applied at the absolute discretion of the trustees for the beneficiary or his family, the beneficiary no longer having any right to receive the income himself.
Secret Trust - Where the testator does not wish to state the name of a beneficiary in his/her Will, he/she can set up a `secret` or `half secret` trust. In such a case, of course, the trustees will have been informed of the name of the beneficiary.
Statutory Trust - On the death of a person dying intestate, leaving any real or personal estate; such estate shall be held on trust by the deceased`s personal representatives pending sale. Unless there is a contrary intention, the personal representatives will have the power to postpone sale.
Two-year Discretionary Trust – A trust created by the deceased`s Will, which allows the trustees, within two years of the testator`s death, to distribute the estate to the beneficiaries at their discretion. This allows the trustees to decide on the disposition of the estate in the light of the tax and other considerations, which exist at the time of death.