Setting up a trust can be an advantageous way to manage your assets and ensure they are distributed according to your wishes, to the right people, at the best time. Equally the wrong trust, created badly or in an ill-advised way can be an expensive disaster for all concerned.
What is a trust?
A trust is a legal entity that can hold and manage assets on behalf of one or more beneficiaries. A trust is a legal arrangement that is usually, but not always, created by a legal document in which you (‘the settlor’) transfer ownership of assets to another person or people (‘the trustees’) to hold and manage it for the benefit of one or more third parties (‘the beneficiaries’). Trustees have duties to manage the assets in the trust in accordance with the trust document and the law.
The different types of Trusts
There are many different types of trusts either intentionally created by a document, usually a Will or a legal deed, or arising or inferred automatically out of certain circumstances. The type of trust required will depend on the circumstances in which it’s being created e.g. while you are alive (‘a lifetime trust’ or an ‘inter vivos trust’) or on your death (‘a will trust’ or ‘testamentary trust’), and the intention behind it – why it is needed.
Some examples of the more usual trusts that can be created during your lifetime or on your death are:
• A Bare Trust
This is the most straightforward type of trust where an asset is held for another by trustees in their name, but the asset really belongs outright to the beneficiary, and generally for tax and other purposes it is treated as owned by the beneficiary. Sometimes they are created for children who may be under 18 and unable therefore to legally own the asset in their own name. Once they reach 18 they may choose to leave the asset in the trustees’ name, but equally they can require that it is transferred to them.
• A Life Interest Trust
Sometimes referred to as an ‘IIP trust’ or ‘interest in possession’: Usually here the trustees hold the asset for the beneficiary for their lifetime, and after their death (or sooner if the trust document permits it) the asset will pass to other beneficiaries. Their tax treatment differs depending upon whether this is something you create in your lifetime or on your death. The identity of the beneficiary, and the type of asset held can also affect the tax treatment. They are often used to give someone the right to live in a property for their lifetime with the property then passing elsewhere after they die. In Wills these types of trusts can be useful in a second marriage scenario.
• A Discretionary Trust
You may also sometimes hear these trusts being described as ‘relevant property trusts’ or a trust within ‘the relevant property regime’. A discretionary trust is usually a very flexible arrangement where assets are held by trustees for a range/ variety of beneficiaries (who can be named or defined as a class or group of people e.g. ‘my grandchildren’), and the trustees are given discretion about which of the beneficiaries to benefit and when. It is usual that you would set out your wishes and give the trustees some guidance in a separate letter of wishes. Special tax rules apply to discretionary trusts. Their flexibility makes them very useful but the legal and tax rules that apply to them are complex, and it is very easy for ill-advised arrangements or trustees to lead to problems.
Sometimes trusts can include elements of being both life interests and discretionary.
These are just a few examples of the different types of trusts that can be created. Trusts are a big subject, so taking good quality legal advice is essential so you create the right type of trust for the circumstances. It is important to find a specialist solicitor with relevant qualifications and experience. An experienced Solicitor who is a STEP (The Society of Trust and Estate Practitioners) member will be a good starting point.
Remember that the most appropriate type of trust will depend on the specific circumstances of each individual case.
Do standard or free trust forms and documents work?
They might work but the question is, to achieve what?! Generally, if a trust is ‘sold’ as a standard, one size fits all amazing solution, the chances are it won’t be quite right or create arrangements to best effect for you and your individual circumstances.
*WARNING: If you randomly get invited to a seminar at a local 4 star hotel with complimentary refreshments, presented by someone who is not legally qualified, and they convince you to transfer your house or other savings into a trust to save tax or money, or protect your loved ones, for fees of several thousand pounds (which they may only tell you about later, so beware the initial headline fee and please do read the small print), remember: THERE IS NO SUCH THING AS A FREE LUNCH!*
A recent example we have dealt with is where a third party (non-solicitor adviser) provided our client with a standard document to place a substantial investment in trust to purportedly protect money from future care fees. They are single with no immediate close family or anyone else dependent on them. The non-solicitor adviser was paid more than £12,000 in fees for the financial transaction
When might you need to set up a Trust?
There may be specific times in your life when you might consider setting up a Trust, this includes:
• Estate Planning
Setting up a trust will often be discussed as part of your estate planning for example when you are making your Will, or if your estate on death may be liable for inheritance tax. Your Will may include trusts and/ or you may also consider putting some assets into trust while you are alive.
• Protecting Assets
A trust can sometimes create a protective ‘force-field’ around assets so they may be protected from future claims from third parties. People often consider using trusts to protect some of their assets if for example long-term care costs are a concern, or there are worries around marital or relationship breakdowns. They can be useful and advantageous in second marriage scenarios, particularly where there are children from previous relationships, or if a beneficiary is very young, or may be financially irresponsible. Trusts can also be very beneficial if a beneficiary is known to be vulnerable or have disabilities. Trusts cannot always work to protect assets, it depends on the circumstances and sometimes they can be disadvantageous for tax.
• Managing Assets
A trust can be a useful vehicle in which to manage assets going forward particularly in some of the circumstances mentioned above. In this context it is essential to appoint the right people, with the necessary skills and attributes to be trustees. Being a trustee is a job that comes with many legal duties, responsibilities, and potential liabilities. It is not an ‘honour’ to be asked to be a trustee and it is not something to be undertaken as ‘a favour’.
The decision to set up a trust and the framework for it should only be made after careful consideration of all the circumstances and objectives. It should only be done with the advice of a specialist trust solicitor often acting alongside an accountant and financial adviser. All the free information out there makes everyone think they should be able to know everything, without paying for expert advice. The best piece of advice is to take good advice. Many intelligent people fall for trust scams and schemes that are sold by ‘estate planning’ companies with clever marketing, and apparent 5 star reviews. They are very expensive solutions that are cleverly ‘sold’ and they often create multiple problems further down the line.
Acting as a Trustee
You have various legal duties and responsibilities if you are a trustee. You cannot hide behind the trust, and you may find yourself personally liable in some circumstances if things go wrong. Being a trustee puts you in a position of great responsibility and ignorance will be no defence if things go awry.
How much does a trust cost?
The cost of setting up a trust will depend on all the circumstances and whether this is something you do in your Will (so the trust only takes effect on your death) or during your lifetime. You are not paying for just a standard document to be produced, you are paying for someone to take time to consider your circumstances first and give you valuable advice before the document is drafted. Reflective of this, fees for a lifetime trust will usually be upwards of £1,500 (excluding VAT). You will need to discuss your circumstances with us before we can provide a fee estimate. Getting it wrong will be far more expensive.
How McKenzie Law can help you with Trusts
We create and manage many varied trusts. Our knowledge and experience helps us provide an informed, bespoke service. We work closely with settlors and trustees and often also act as professional trustees. We hope this article will give you a flavour of trust and how we can help you. For further advice about your circumstances and requirements, please contact our expert team.