Most people have heard of trusts, but don’t necessarily understand what they do. Trusts are legal vehicles that are frequently used in estate planning, and they can be used for different purposes. The issue is that trusts are often misunderstood, which begs the important question: what exactly is a trust?
What is a trust?
A trust is a legal relationship between three groups of people:
- the person that sets up the trust (the “Truster”)
- the people that manage and have responsibility for the trust (the “Trustees”)
- the people that benefit from the trust (the “Beneficiaries”)
There can also be other people involved in a trust, but that tends to be reserved for more complex situations.
The Truster will place something e.g. funds or assets into a trust (called the “Trust Fund”) with the Trustees, to be managed by them according to a set of legally binding rules and conditions, for the Beneficiaries. Those rules would normally be put into writing in the “Trust Deed”, which is binding on the Trustees.
Why set up a trust?
Trusts can be set up for any number of purposes, at different points in life or indeed on death with provisions included in a will. They are most commonly used as part of estate planning. Specifically, they tend to be used (and are very effective) for: (i) protecting people; and / or (ii) protecting assets.
A trust can:
- provide funding for someone for specific purposes e.g. education fees
- reduce Inheritance Tax, thus allowing more of your estate to go to your family or friends
- allow funds / assets to be managed on behalf of someone who may need additional help e.g. a disabled family member or someone unable to manage assets alone
- provide for spouses and children from previous relationships
- ring fence assets from the consequences of a relationship breakdown
- protect important family assets for future generations
What are the consequences of setting up a trust?
Setting up a trust has similar consequences to setting up a company; certain things will have to be done for as long as the trust exists.
If a company is incorporated then its directors will need to manage it, accounts will need to be prepared, tax may need to be paid etc. A trust is much the same: there will likely be a set of related accounts; tax may also have to be paid; and the Trustees will have a legal duty to manage it according to the Trust Deed and trust law generally.
Often the most significant concerns about setting up trusts is the loss of ownership: in setting up a trust and passing funds / assets into them, the Truster no longer owns the assets. While this is true (the assets become the legal property of the Trustees) that is not the same as losing ‘control’ of the asset. Steps can be taken in the appointment of Trustees to ensure that the necessary control over the Trust Fund is in place, subject to the terms of the Trust Deed.
A trust is unique to your circumstances
Trusts come in many shapes and sizes, and can be used for a number of purposes. There are many factors that have to be discussed when setting up a trust (more than can be put in a blog), but generally, they are very useful in estate planning and can be managed easily with the benefit of careful preparation early on.
