A Trust is a vehicle for holding assets and is established when property is held by a person (the trustee) who is obliged to look after it for the benefit of another (the Beneficiary).
A trust can be set up in lifetime or on death by a formal document (e.g. a deed or a will), by oral agreement or by the operation of law (for example when a person dies without a will).
Why are trusts useful?
- They provide protection of assets
- They provide protection for beneficiaries (minors, vulnerable adults)
- Tax efficiency
- They can enable the giving away of assets but with retention of some control over those assets
Types of trust
The person creating the trust (the settlor) can choose to fix the beneficiaries' interests in the Trust assets, for example:
- by giving one person a right to the income from the Trust assets during their lifetime and giving another person the right to the capital and income following the death of the first person; or
- by stating that the assets are to be held for a group of children until they reach a particular age.
In other circumstances, it can be beneficial for the settlor to give the trustees discretion as to which beneficiaries receive capital and income from the trust, how much they receive and when.
Different types of trust are taxed differently. The tax consequences for the particular Trust types should form part of the decision regarding which type best suits the circumstances and wishes of the settlor.
Who should be the trustees and who chooses them?
Trustees are initially appointed by the settlor. It is advisable to have at least two trustees and trusts of land are limited to a maximum of four trustees . The trust deed will specify who has the power to retire/appoint new trustees once the trust is up and running.
Trustees owe duties of loyalty, honesty, integrity, good faith and transparency to the trust and to the beneficiaries. It is vital that they take the time to get to know the trust and all of the documents relating to it that come under their control.
It is recommended that any newly appointed trustees seek appropriate legal and financial advice to ensure they are complying with their legal obligations.
The creation of trusts during lifetime can lead to an immediate inheritance tax liability for the settlor. Individuals should seek legal advice as part of an estate planning process before setting up trusts.