Whether you’re considering creating a lifetime or will trust, our guide to family trusts in the UK will help you get started.
What is a trust?
A trust is a legal entity set up by an individual (known as the settlor) which allows another person to benefit from an asset without being its legal owner. A person is chosen to manage the trust (the trustee) on behalf of the beneficiaries. A trust continues to protect the settlor’s assets after death or in the event that they lose capacity to manage their own affairs. Trusts can be complicated structures with complex tax implications; expert legal advice should always be sought before setting one up.
Why set up a family trust?
Passing on wealth via a will or lifetime gift can sometimes be inefficient. A trust can help ensure that your family get the most out of your assets. People set up family trusts for various reasons, including to:
- protect assets for beneficiaries who can’t look after the assets themselves;
- protect assets from divorcing spouses or business creditors;
- protect beneficiaries’ entitlement to state benefits where an inheritance may compromise this;
- provide for children under 18 in an income tax-efficient way;
- ensure that a current spouse and children from a previous relationship are all cared for;
- avoid inheritance tax for family members and their estates.
| Bare trusts |
The trust assets are held by the trustee but the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales). Bare trusts are often used to pass assets to young people with the trustees looking after them until the beneficiary is of age |
| Interest in possession trusts | The beneficiary receives the income from the trust (less any expenses incurred in administering it). |
| Discretionary trusts |
The trustee can make certain decisions regarding how best to use income from the trust and in some cases the assets themselves. Discretionary trusts are often used to put assets aside for beneficiaries who are not capable of dealing with money or assets themselves. |
| Settlor-interested trusts | The person creating the trust or their spouse/ civil partner is a beneficiary. |
| Non-residence trusts | Where trusts are set up abroad for tax planning purposes. The tax rules for such trusts can be very complex. |
What is a family trust deed?
The document drawn up by a solicitor which sets out the specifics of the trust is called a ‘trust deed’. At the very least it should stipulate the names of the trustees and beneficiaries; list the property, funds or assets to be held in trust; and detail how the trust should be run.
What is the role of the trustee?
The trustee manages the trust on a day-to-day basis and pays any relevant taxes. It is the legal duty of the trustee to follow the rules laid down in the trust deed about how the trust should be governed. The trustee is the legal owner of the assets held in the trust and must manage the trust for the benefit of each of the beneficiaries equally (if there is more than one). A trust must always have at least one trustee, although these trustees can change.
Trustees must keep beneficiaries informed with regards to the trust and should provide trust accounts. They are not duty-bound, however, to provide information or documentation relating to their decision-making processes.
Is it possible to make changes to a trust?
The trustee is able to change the terms of the trust if there is a clause allowing this in the trust deed, or if all of the beneficiaries give their express consent to do so. Failing these, the trustee can go to the court in order to seek a change to the conditions of the trust.
What is the difference between a will trust and a lifetime trust?
A will trust is created within a will with the intention of protecting property to pass on to beneficiaries after the settlor has died; it is activated upon their death. A lifetime trust is created and comes into effect during the lifetime of the settlor.
Why use a will trust?
Will trusts are often used by partners to protect wealth from being drained by long-term care fees. Should the surviving partner require long-term care, only their half of the family home will be assessed by the local authority; the part ring-fenced by the will trust is not counted and will be protected.
Another reason for using a will trust is to avoid what is known as ‘sideways disinheritance’. This is when the first partner dies, leaving a surviving spouse and children from this marriage. The surviving partner goes on to remarry but fails to make provision for their existing children in a new will. There is a risk that the children will not inherit anything and that the entire estate will pass to the new spouse. A will trust can be used which allows the surviving spouse to continue living in the family home but the first partner’s share will eventually pass to their children upon the surviving spouse’s death.