Passing your estate to the right people at the right time

Putting your savings, investments, life policies or assets into a trust can play an important part in estate planning. A trust is a legal entity that has control over assets for the benefit of one or more people, and there are different types of trust which can be set up according to what you intend to achieve.

 

When you set up a trust, you will choose one or more trustees to be responsible for the assets. You will also choose one or more beneficiaries who will receive the assets at a time specified by you. Setting up a trust can ensure that, for example, your estate is passed to the right people at the right time, with the possibility of reducing inheritance tax liability.

Trusts may be set up for a number of reasons, for example:

• to control and protect family assets

• when someone is too young to handle their affairs

• when someone can’t handle their affairs because they are incapacitated

• to pass on money or property while you are still alive

• to pass on money or assets when you die under the terms of your Will – known as a ‘Will trust’

• under the rules of inheritance that apply when someone dies without leaving a valid Will (England and Wales only)

What is a trust?

A trust is an obligation binding a person called a ‘trustee’ to deal with property in a particular way for the benefit of one or more ‘beneficiaries’.

Settlor

The settlor is someone who puts assets into the trust.

Trustee

The trustee is someone who holds, manages and makes the decisions about the assets (such as money, land or buildings) in the trust.

Beneficiary

The beneficiary is someone who benefits from the assets in the trust.

The main types of private UK trust:

Bare trusts

With bare trusts, the beneficiary (the person who benefits from the trust) has an immediate and absolute right to both the capital and income in the trust. Beneficiaries will have to pay income tax on income that the trust receives. They might also have to pay capital gains tax and inheritance tax.

A bare trust is one where the beneficiary has an immediate and absolute right to both the capital and income held in the trust. Bare trusts are sometimes known as ‘simple trusts’.

Someone who sets up a bare trust can be certain that the assets (such as money, land or buildings) they set aside will go directly to the beneficiaries they intend. These assets are known as ‘trust property’. Once the trust has been set up, the beneficiaries can’t be changed.

The assets are held in the name of a trustee – the person managing and making decisions about the trust. However, the trustee has no discretion over what income or capital to pass on to the beneficiary or beneficiaries.

Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland. At this point, beneficiaries can demand that the trustees transfer the trust fund to them.

Interest in possession trusts

For income tax purposes, an ‘interest in possession’ trust is one where the beneficiary is entitled to trust income as it arises. From an income tax perspective, an interest in possession trust is one where the beneficiary has an immediate and automatic right to the income from the trust after expenses. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.

The beneficiary who receives income (the ‘income beneficiary’) often doesn’t have any rights over the capital held in such a trust. The capital will normally pass to a different beneficiary or beneficiaries in the future. The trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income. However, this will depend on the terms of the trust.

Mixed trusts

Mixed trusts are a combination of more than one type of trust. For tax purposes, the different parts of a mixed trust are treated according to the tax rules that apply to each part of the trust. A mixed trust is one where the income is taxable on more than one basis. This may be because there are distinct different parts to the trust fund from the start so that the income is always held in different trusts. However, they may also be the result of changes in the beneficiaries’ circumstances.

Settlor-interested trusts

If you set up a trust from which you or your spouse or registered civil partner can benefit, it counts as ‘settlor-interested’. In this case, you will have to pay income tax on any income received by the trust, even if it’s not paid out to you or your spouse or registered civil partner. A settlor is someone who ‘makes a settlement’. They do this by placing assets such as money, land or buildings in a trust. This is known as ‘settling property’. Settlors can do this directly or indirectly, by giving the funds to someone else to set up a trust. They normally place assets in a trust when the trust is created but can also do so later on.

Parental trusts for children

Some trusts are set up to give benefits to the minor unmarried child of the person who put the assets into the trust – the ‘settlor’. These types of trusts are known as ‘parental trusts for minors’. The income from the trust is taxed as the income of the settlor. A settlor is someone who ‘makes a settlement’. They do this by placing assets such as money, land or buildings in a trust. This is known as ‘settling property’. Settlors can do this directly or indirectly, by giving the funds to someone else to set up a trust. They normally place assets in a trust when the trust is created, but can also do so later on.

Non-resident trusts

The tax rules for non-resident trusts are very complicated. Non-resident trusts are usually ones where: • none of the trustees is resident in the UK for tax purposes

• only some of the trustees are resident in the UK and the settlor of the trust wasn’t resident, ordinarily resident or domiciled in the UK when the trust was set up or funds added

Trusts for vulnerable people

Some trusts for disabled people and children get special tax treatment which means they may pay less tax. These trusts are known as trusts for ‘vulnerable beneficiaries’.

A beneficiary is anyone who benefits from a trust. A ‘vulnerable beneficiary’ is either:

• a person who is mentally or physically disabled

• someone under 18 – called a ‘relevant minor’ – who has lost a parent through death

Generations to come

By using trusts, you have control over what happens to your estate, both immediately after your death and for generations to come.

Placing assets in trust also ensures that they pass smoothly to your heirs without the delays, costs and publicity often associated with probate. That’s because the assets in a trust are legally owned by the trustees, not the settlor.

Trusts are very complicated, and you may have to pay inheritance tax and/or capital gains tax when putting property into the trust. If you want to create a trust, you should seek professional advice.