What is a Trust and why you might need one

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A Trust is a way of protecting assets whilst, at the same time, making some or all of those assets available for the benefit of one or more person. The person setting up the Trust can control who makes decisions about the assets, who is going to benefit and to what extent and when, and that control lasts for the lifetime of the Trust , even if you, the person who set it up, is no longer around.

Trusts were also historically a common factor in Inheritance Tax planning. Various changes the government has made to tax over the past few years have reduced the effectiveness of Trusts in this area. However they are still useful for Care Fee planning and to protect beneficiaries from themselves or undesirable influences in their lives.

Trusts are either Express – i.e. you do something to create them by either including them in your Will or creating a settlement, or are Implied. Implied Trusts come in to being because of the circumstances.

Express Trusts are either made during your lifetime – called Lifetime Trusts - or are created in a Will– called Testamentary Trusts - or created automatically by law in certain circumstances – called Statutory Trusts.

There are a number of different types of Trust but the following are those most commonly used:

Accumulation and Maintenance Trust

This is the most common type of Trust and is used for children whilst they are young. This Trust is set up by Law for any child under the age of 18 who receives money or assets. The purpose of the Trust is to look after the money whilst the child is young. The people who look after the money are the Trustees.

Things to consider in such a Trust are:

1. Who should be the Trustees?
2. What age should the children receive their share?
3. What assets should form part of the Trust?

Historically this was a very tax effective type of Trust . However the Trust tax regime changed in 2006 and this type of Trust no longer enjoys a preferable tax status. However it is still a useful Trust to protect young beneficiaries from making rash and wasteful mistakes if they inherit at an age when they are not mature enough to make reasoned decisions.

The changes made by the government created a stripped-down version of this type of Trust called a Minor Beneficiary Trust. This type of Trust can only be created in the Will of the parents of the beneficiary and the age of receipt is set at 18.

The greater flexibility and control given by the Accumulation and Maintenance Trust makes it a more attractive proposition in most circumstances, even though the historic tax advantages are no longer available.

Life Interest Trust

This is generally seen in a Will given to a surviving dependent such as a spouse.

The main purpose of a Life Interest Trust is to provide for the dependent (called a Life Tenant) during their lifetime and then to give the capital to ultimate beneficiaries, often the children of the deceased. The Life Tenant would be entitled to spend the income of the Trust fund but not the capital. The capital must grow in value throughout the life of the dependant for the benefit of the ultimate beneficiaries.

This type of Trust is often used to provide for a second spouse, but also to protect the interests of the children by a first marriage. It is also commonly used where Care Fee planning is required.

It is also possible to set these up as a Lifetime Trust and a Self-Settled Life Interest Trust is a common tool used in care fee planning.

Disabled Beneficiary Trust

This is used for beneficiaries who are unable to lead an independent life because of mental or physical disability.

Discretionary Trusts.

All the Trusts mentioned above are Fixed Interest Trusts – i.e. what each beneficiary is entitled to is fixed at the outset.

A Discretionary Trust consists of a group of beneficiaries that can all potentially benefit, but are not guaranteed to benefit. Instead they will only benefit at the discretion of the Trustees.

This type of Trust is useful when you want some people to be able to benefit from a Trust but in such a way that it doesn’t affect other elements of their finances, such as entitlement to Local Authority funding for care.

One type of Discretionary Trust is a Nil Rate Band Trust included in a Will. This has been used historically in Inheritance Tax planning although the usefulness of this Trust was reduced on the introduction of the Transferable Allowance in 2007.

However the Transferable Allowance is only valid if you are married (or in a civil partnership). Nil Rate Band Trusts can be used to effectively extend this allowance to unmarried couples, siblings living together and any other financial partnership. It can also be an effective way of Inheritance Tax planning for the next generation. The most common reason for the use of a Nil Rate Band Trust today, however, is Care Fee planning.