Setting up a trust is one of the most tried and tested methods for protecting assets. It can be an important wealth management tool and critical element in prudent succession planning.
If you are planning for the future, you may have considered whether setting up a trust might be right for you. A trust can be a very effective tool for financial planning, offering a flexible way of transferring ownership of your property. In this post, we look at what a trust is and why you may wish to set one up.
What is a trust?
A trust is essentially a legal arrangement that allows you to 'gift' something to someone else. You can gift money, property, shares, insurance policies, and other assets using a trust. A trust will allow you to transfer ownership of the property to another party, known as the trustees. However, the trustees then hold the assets for the benefit of the beneficiaries, which can be a person, a group of people or an organisation, without giving them access to the assets. A common example is a trust set up for children or grandchildren; the trustees will hold the assets in trust until they come of age. When managing the trust assets, the trustees must conduct their business in the beneficiary's best interests.
Why set up a trust?
There are many reasons you may wish to set up a trust, and there are different types of trust most suited to each purpose.
Flexibility and control
A Discretionary Lifetime Trust provides both flexibility and control for trustees. While you are alive and the trust is in place, you can retain some control and guide trustees in their decision making. You have a say in how the trust assets are used and the money is spent, for example, you could instruct trustees to pay for a grandchild's tuition fees. You can also be a Trustee yourself.
A tax-efficient way to pass on your assets
A Trust can also be tax efficient, however, it is important to ensure that any funds you transfer into the trust are not returned to you in any way, including any income produced by the trust or benefit (e.g. rent free occupation of a property).
A Trust by Deed of Variation is another tax-efficient way to pass on wealth. If you have inherited from another person's estate in the last two years, you can take advantage of Inheritance Tax (IHT) savings immediately by passing the funds from the deceased's estate into a trust using a Deed of Variation. This type of trust is also very flexible.
Planning for the future
A Will Trust allows you to make additional arrangements that only come into effect after you pass away. Details of such a trust are set out in a clause in your Will. Such a clause is often used to account for any changes in your family circumstances, and you can use a non-binding 'Letter of Wishes' to guide the trustees in their decision making. Such a trust could be used to provide a future income for your spouse, partner or children.
Using trusts to protect funds for vulnerable beneficiaries
Trusts are often used to protect the interests of vulnerable and disabled beneficiaries, and Discretionary or Disabled Person's Trusts are the most commonly-used trusts for this purpose. There are several benefits of using a trust in this way, including:
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- Protecting the beneficiary's interest as they do not have access to the funds or assets held in the trust
- Any funds held in the trust should not affect means-tested benefits
- A trust can be the legal owner of a property – therefore can be used to purchase a home for the beneficiary. As the owner of the property is the trust and not the beneficiary, it should then not be counted when considering benefits and care funding
Trustees can use their discretion to apply any capital or income for the beneficiaries depending on their needs.
Specialist Trusts Solicitors, Edinburgh
If this article has raised any questions or you would like to discuss an issue relating to a trust, with one of our specialist estate planning solicitors, then please complete our contact form or call on 0131 225 1200.
Murray Beith Murray is dedicated to helping our clients solve problems and preserve their wealth, providing certainty of continuity. Our highly personal service reflects our culture, which is centred on integrity, trust and expertise, and the guidance we provide has been designed to be an investment, not an expense, allowing us to work with generations of the same family.