As part of your will, you may wish to leave assets to your spouse, civil partner or children. Alternatively, you may wish to pass assets to your next of kin whilst you are still alive. One way of doing this is to set up a family trust
Trust basics
A trust enables a 'settlor' to give away assets, but on terms that they will be dealt with in a certain way - usually to benefit their children or other members of their family.
Legally, ownership of the assets (the trust property) passes from the settlor to the trustees of the trust - the trustees become the owner of the assets, instead of the settlor. However, the trustees must look after the assets according to the terms of the trust set up by the settlor. These will say who the trustees are, identify the beneficiaries (the people entitled to benefit from the trust assets and/or income generated from them) and how the trust is to operate.
The trust can provide that different beneficiaries may receive different benefits from the trust. For example:
- A settlor might want assets
- to pass to a child, but not until the child is older. Assets can be held on trust until the child reaches the age specified in the trust.
- A settlor might want assets to eventually pass to the children, but to ensure that their spouse can benefit from them for the rest of his or her life.
A settlor can set up a trust during their lifetime (under a deed of trust), or can provide for a trust to be set up in their will, to take effect on their death. Some settlors also write a 'letter of wishes', which gives guidance to the trustees on how the settlor would like them to administer the trust assets. This is not legally binding, but can be helpful to the trustees if the trust is a discretionary trust, ie the deed gives the trustees wide-ranging powers to decide how the benefits are to be shared out.
Trustees do not normally benefit from the trust but can be specifically named as beneficiaries. Trustees can claim expenses from the trust and professional trustees can claim their professional charges.
The trustees have a legal duty to act fairly, balancing the interests of different beneficiaries.
Types of trust
There are many different types of trust, which are used in different circumstances.
A bare trust is a simple form of trust where the beneficiary is absolutely entitled to the trust property (provided the beneficiary is 18 or over and mentally capable). Bare trusts are often used to hold investments for children (and for adults who wish to hold shares anonymously - as it is the name(s) of the trustee(s) that appear in a company's register of shareholders, and not the beneficiary's name).
Under an interest in possession trust, a beneficiary is entitled to the net income of the trust - the trustees must hand over all the income after expenses and taxes. These are often used in wills, to give a spouse (or another dependent) an income for life. Once the spouse has died, the assets pass to the children.
A discretionary trust is one where the trustees have more discretion over how they distribute income and capital. For example, several children might be the beneficiaries of a discretionary trust, and the trustees could provide money to each child as they need it (eg to pay for their education).
An accumulation and maintenance trust is a special kind of trust set up for the benefit of a group of grandchildren. These have become less common since changes to the tax rules in 2007 eliminated their tax advantages.
A variety of other kinds of trust can be set up for specific purposes. Flexible discretionary trusts are often the best way of achieving the desired results.
How do I set up a bare trust?
If you're in the position of having to set up a trust , it's easy to imagine weighty rolls of parchment and a hoary old solicitor sitting at a desk, quill in hand. In fact, as I discovered, setting up a bare trust is very simple. So simple, in fact, that after a brief consultation with a solicitor, I was told that they very rarely do them any more.
In reality, bare trusts really are, well… bare. There is very little to them - technically you don't even need anything written on paper, although it is advisable to make a dated note of any actions you take in your role of executor. In my Dad's will, he stated that he wanted to leave set sums of money to each of his grandchildren, to be kept in a bare trust until they reached the age of 18.
What this meant I had to do, once probate was granted and all the assets had been gathered together, was open a bank account (in the grandchild's name) for the trust and deposit the stated amount, to be left there until the child reaches the age of 18 at which point they are free to inherit. I could write a document saying that was what I had done and date and sign it, but that's not essential.
In this situation the two most important documents are the deceased's will and the grant of probate. The will states that the trusts are to be set up, the amount to be placed in trust and the name, date of birth and address of the beneficiary and the grant of probate places the legal responsibility to enact the will on the executor.
In my situation, the bare trusts I was setting up were for the benefit of my children and therefore both myself and the other executor know about them. If you were setting up a trust for someone unrelated to you, it would be advisable to write a letter to the parents/guardians of the child with details of the trust, together with a copy of the will and the grant of probate. But, as I discovered, far from being a complicated and costly legal process, setting up the bare trust was one of the most straightforward tasks I had to do as an executor.
By Fanny Marshall
Taxation
The tax treatment depends on such factors as the kind of trust, the value of the assets put into it, and who the beneficiaries are. Changes to the rules in 2007 mean that the tax treatment of many trusts is no longer as favourable as it used to be, but there are still circumstances in which they can help to reduce the overall level of tax payable. This is a complex area where you need advice based on your particular circumstances.
Income and capital gains in a bare trust are normally treated as the income and gains of the beneficiary. However, if assets provided by a parent of the beneficiary produce income of £100 or more, that income is taxed as the parent's.
Tax rates for trust income for interest in possession, discretionary or accumulation trusts depend on the value and source of the income:
- For accumulation or discretionary trusts with income under £1,000, and interest in possession trusts, income from rents, trading and savings is taxed at 20% and dividend income is taxed at 8.75%.
- For accumulation or discretionary trusts with income over £1,000 the rates increase to 39.35% for dividends and 45% for other income.
- The trustees do not have the benefit of an annual dividend allowance. Tax is calculated on all dividend income.
Trusts are subject to capital gains tax on any gains over their annual capital gains tax allowance which is half that of an individual.
Beneficiaries are liable to income tax on any income they receive from the trust, but can offset the tax already paid by the trust. Beneficiaries are not liable for tax on distributions of trust capital.
The inheritance tax (IHT) treatment of trusts depends on the type of trust and the amounts gifted into the trust. Lifetime gifts into 'relevant property trusts' (most kinds of trust) are subject to an immediate 20% IHT charge on amounts in excess of the nil rate band (£325,000). There is a further 6% charge every ten years on the value of the trust's assets, with a proportionate charge on any assets withdrawn from the trust between ten-year anniversaries.
If you die within seven years of making a gift into trust, there may be a further inheritance tax liability.
Bereaved minor's trusts and 18-25 trusts are trusts set up under your will for the benefit of a child. These have tax advantages compared to ordinary discretionary trusts.
There are also tax advantages to trusts set up under your will for your spouse, and to some trusts where the beneficiary is mentally or physically disabled.
You should take advice on whether trusts could be of benefit for your particular circumstances and requirements.
