Trusts: The Basics.
17th February 2015
Trusts are a way of looking after assets for people.
What is a trust?
A trust is a legal arrangement where one or more ‘trustees’ are made legally responsible for holding assets.
The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more ‘beneficiaries’.
The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the ‘settlor’). The settlor’s wishes for the trust are usually written in their will or set out in a legal document called ‘the trust deed’.
The Purpose of a Trust
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
There are several types of UK family trusts and each type of trust may be taxed differently. It is always advisable to take professional advice to ensure that you are fully aware of any potential liabilities.
What is ‘trust property’?
‘Trust property’ is a phrase often used for the assets held in a trust. It can include:
- land or buildings
- other assets, such as paintings, furniture or jewellery – sometimes referred to as ‘chattels’
What is a Settlor?
A settlor is a person who has put assets into the trust. This is known as ‘settling’ property. Assets are normally put into the trust when it’s created this can be on death, via a Will or during your lifetime. Often as part of a tax planning exercise you may wish to move assets out of your own estate into a separate Trust, it is, depending upon the terms of the Trust, possible for additional assets to be added at a later date.
The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.
The Role of the Trustees
Trustees are the legal owners of the assets held in a trust. Their role is to:
The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees. One trustee should be a professional familiar with trusts – a solicitor, for example – while the other may be a family member or relative.
What is a Beneficiary?
A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiary, such as a whole family or a defined group of people. Each beneficiary may benefit from the trust in a different way.
For example, a beneficiary may benefit from:
- the income only – for example, they might get income from letting a house or flat held in a trust
- the capital only – for example, they might get shares held on trust when they reach a certain age
- both the income and capital of the trust – for example they might be entitled to the trust income and have a discretionary interest in trust capital
If you’re a beneficiary you may have extra tax to pay or be entitled to claim some back depending on your overall income.
Get professional help for your trust
Understanding trusts can be difficult so you should consider working with a solicitor or tax adviser to ensure that the Trustees act in the best interests of the Trust.
It should be remembered that the trustee is still legally responsible for the handling of the Trust and in particular its tax affairs.
Whether you are thinking of creating a Trust or are acting as a Trustee already it is important to fully appreciate the role and the implications of your actions on the Trust and your own personal liability. Taking legal advice should be considered a legitimate Trustee expense.