A Trust is like giving your money to “mum” to look after until the summer holidays and is not just something used by the old and grey. They are like the piggy bank put on top of the kitchen cupboard, just out of reach until “mum” says it’s ok to spend some and gets it for you….
So, what is a Trust in legal terms
A trust is a legal concept which enables assets (cash, investments, property) to be held for the benefit of others (in the piggy bank). Control of the assets transferred is held by the trustees, usually 2 or more. The trustees own the assets and they can be friends, family or a company. The trustees (“mum”) administer the trust for the beneficiaries.
The trust is created by a person(s) who is called the settlor. The settlor owns the asset (pocket money) that is transferred to the trust (piggy bank) and on transfer ceases to own it or have any control over it.
The trust is created for other people or beneficiaries, for example, you put money in the piggy bank to save for birthday and Christmas presents or parents can save safely for their children’s education and university.
It is possible to be a “mum” as in trustee and, also, be a beneficiary. The settlor, who put the money in the piggy bank, can also be a beneficiary and a trustee looking after the money. The purpose of the trust will determine whether it is effective for one person to have more than one role, i.e. a trust for Uni fees will have parents or grandparents as a settlor and trustees, but also potentially the beneficiary, if they are going to pay the fees.
The distinctive feature of a trust is the separation of legal ownership and beneficial ownership of the money in the trust fund. The trustees are the legal owners of the money, but the trustees must always put the interests of the beneficiaries above their own. So, if you set up a trust (you are the settlor) you no longer own the money, the trustees do.
Trusts are used as a means for individuals (and families) to control how their assets & money is held and transferred to others. Control is a major aspect of trust planning and they are used to protect assets in the long term.
Trusts allow clients to put measures in place to protect their assets from risk. Some of the risks that may be mitigated for are:
- loss of heirlooms/”family money” through divorce or re-marriage
- incapacity arising through a health event;
- being too young or inexperienced to deal with property
- certain taxation outcomes
As advisers, one of the main drivers of advising clients to use a trust could be financial and tax based. However, for many families that may be only part of the reason, with other motivations, some listed above, being the main reasons for the use of a trust.
How is a trust started?
Some trusts are started automatically by operation of the law without any written document, for example when someone dies without writing a will (intestate) and funds need to be held for a minor child.
However, for most legal systems a trust is created by the signing of a trust deed, which outlines the settlor’s clear intention to create the trust. The document will also set out who the trustees are, what assets, money and investments are being transferred, the beneficiaries are named individually or as a group (such as ‘children of x’) and the powers given to the trustees for administering the trust.
In some trusts, a person may be excluded from being a beneficiary, for example if the objective is to mitigate for Inheritance Tax then the settlor will be excluded, this is because the Tax Man will say you haven’t actually given the money away, which is necessary to be effective for Inheritance Tax.
How long will the trust last?
The maximum time you can have a trust in England is 125 years, which should be long enough for most people ? of course, the trustees may decide that the trust assets should be given to the beneficiaries before that time.
Trusts and Tax
Trusts are occasionally represented as just devices to avoid tax. In reality, there are virtually no circumstances in which anyone would be well advised to set up a trust just to gain tax advantages,
Having said that, trusts, can have a key role in helping families negotiate the complexities and costs of inheritance tax. Trusts are used in this capacity to ensure that family wealth is passed down generations before the Tax Man takes his hefty cut.
An example of how we have helped clients in the past is:
‘Mark Beresford has been my Financial Adviser since 2003. He has enabled me to create a Trust Fund which productively uses money I inherited, to create an income for me now that I have retired from my career, and which ensures the money is also passed on to chosen beneficiaries on my death. Mark has managed my personal savings more efficiently and ethically, while being productive. For someone who feels numerically challenged and disinterested in finance, this has been a relief. He is held in a position of trust, but does not abuse this, nor does he attempt to impress me with jargon. We meet twice annually, when Mark visits my home. It is a business appointment with a social dimension, as my husband and I also consider Mark to be a friend. We continue to appreciate his service to us and so have remained with him for the past 10 years.’ Karen B – Retired teacher
Call us on 0845 8622 789 to chat to us and lets see how we can help you too!