Trusts & protecting assets

What is a Trust?

A Trust is a vehicle for holding assets for a variety of purposes 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 (by Deed or in a Will), by oral agreement, or by the operation of law (for example when a person dies without a Will).

Why are Trusts useful?

  • Protection of Assets
  • Protection of Beneficiaries (minors, vulnerable adults)
  • Tax Efficiency
  • Enables the giving away of assets but with retention of control

Types of Trust

The person creating the Trust (settlor) can choose to fix the beneficiaries' interests in the Trust assets, for example:

  • giving one person a right to income for their lifetime and another the capital and income following the death of the first person; or
  • 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 of 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 this?

Trustees are initially appointed by the settlor. It is advisable to have more than 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 time to get to know the Trust and all 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 all their legal obligations.

Tax consequences

Creation of trusts in 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.