Trusts - An Outline
A trust is the formal transfer of assets (it might be property, shares or just cash) to a small group of people known as trustees (usually two or three) or to a trust company with instructions that they hold the assets for the benefit of others. If the trust is to be made in your lifetime, to take immediate effect, then it requires a trust deed and is often referred to as a 'settlement'. If it is to be created on or shortly after your death then the trust rules must be set out in your Will a 'Will Trust'. Both lifetime and will trusts can be extremely effective and flexible methods of providing for your family.
Taxation
In your lifetime you can create a trust into which you can place chosen assets which you no longer need yourself. This reduces your own wealth and thus your exposure to Inheritance Tax.
You could settle assets in trust for your grandchildren in your lifetime or after your death. Skipping a generation in this way reduces your children's exposure to tax.
A charitable trust created in your lifetime or in your Will can receive unlimited assets, all of which can be free of all forms of taxation.
Trust Types
Most trusts fall into one of two main categories depending on how the income or benefit (dividends, interest, rents, free use of property etc) is dealt with:
Interest-in-Possession Trusts
The Interest-in-Possession Trust is often used in a Will when a person dies leaving a surviving spouse eg. 'To my wife for her life and then to my children'. The widow can enjoy the assets placed in the trust (shares, cash etc or the use of the family home) but is prevented from dissipating the trust capital. This can ensure that the children receive their inheritance. The same trust can be created in the Wills of two people marrying for the second time each having children by their first marriage. It ensures that the children of the first marriage do not see their parents' wealth passing to the children of the surviving step-parent.
Discretionary Trusts
Discretionary Trusts give the trustees power to make gifts of capital and/or income to a stated class of potential beneficiaries. Types of Discretionary Trusts include:
Lifetime Discretionary Trust
A general discretionary trust may suit you if you have identified a particular group of people you want to benefit but you are unsure which of them, in the future, will need help or in what proportions. For example, as a grandparent you might like to set aside capital for your grandchildren including those who may be born later, even after your death. Some of them might be more in need than others and family and financial circumstances could change from time to time.
Being a beneficiary of a discretionary trust gives no entitlement to receive anything from the trust. Who receives capital advances or the income arising is entirely at the trustees' discretion. As a consequence, the death of a beneficiary has no effect on the Trust Fund because the capital of the trust is not regarded as part of the estate of a deceased person.
To be tax efficient, you, as settlor, and your spouse must be excluded from all benefit otherwise the capital will still be regarded as yours for all tax purposes as if you had never created the trust. However, this rule does not apply if the discretionary trust is created in your Will as you would no longer be living.
The most favourable characteristic of the Discretionary Trust is its flexibility. Even the beneficial class can be enlarged by giving the trustees the power to introduce new beneficiaries as the need arises.
Discretionary Will Trust
Just as a discretionary trust can be created to commence in your lifetime, it can also be a feature of your Will, becoming effective only on your death. You might prefer that your executors decide how your estate is to be dealt with in the light of the tax and domestic circumstances existing at the time of death a Discretionary Will Trust could achieve that.
Charitable Trust
You may be inclined, or are expected, to make regular donations to charity or you may have a particular interest in some worthy cause. Rather than make payments out of taxed income or a legacy to a national charity over which you have no control, you could create your own family charity either in your lifetime by a settlement now or on your death by creating a charitable trust in your Will. Gifts to such a trust are free of Capital Gains Tax and Inheritance Tax.