Client Newsletter

A quick guide to setting up a trust

There are a number of ways in which a person can protect their assets and control what happens to them during their lifetime, and after they have died.

A popular strategy for achieving this is the use of a trust. This guide will go into the significance of a trust, the process of setting up a trust and where to seek additional support.

What is a trust?

A trust is a legal arrangement in which assets are held by one person (trustee), for the benefit of another person or a group of people (beneficiary).

A settlor is the person to whom the assets belong.

Trusts are significant because they allow you to preserve your assets and decide what happens to them. They can help to minimise Inheritance Tax and associated costs, and ensure that your loved ones – or an organisation like a charity – enjoy the benefits of your wealth.

You might set up a trust in several different circumstances, including:

  • To control family assets
  • To leave a gift to a charity
  • To pass on assets to a specific person
  • To leave assets to a child or vulnerable person
  • To protect assets while a beneficiary is incapacitated

You can put any assets into a trust, most commonly money, shared property or land.

Significance of a trust

The importance of using trusts lies in your right to control your assets and what happens to them in the long-term.

Many people put their assets into a trust in order to pass them on to children or young people under the age of 18. Under law, children are seen as lacking capacity to accept a willed gift or part of an estate.

By leaving assets in a trust, the settlor ensures that the child receives all the assets they are given.

Another reason why someone might put their assets, specifically their property, into a trust, is to avoid it being used to fund long-term care, as it is no longer considered to be owned by that person.

Types of trust

There are a number of different types of trust which are used depending on the types of assets, the location of the trustees and the age and vulnerability of the beneficiary.

  • Bare – a simple type of trust in which the beneficiary is entitled to all assets if they are over 18 years of age. These are typically used to pass assets on to young people.
  • Discretionary – a trust which gives trustees complete control over all assets, deciding how and when to distribute them to the beneficiaries. These may be used to pass on assets to grandchildren or other young people, with their parents as the trustees.
  • Mixed – combining elements from different types of trust. For example, a person might have access to money within the trust, but not property until a certain condition is met.
  • Interest in possession – beneficiaries have access to income generated by assets in the trust, but not the assets themselves. This might be given to the settlor’s partner while they are alive, with assets passing onto the settlor’s children upon their partner’s death.
  • Vulnerable-person – if the beneficiary is vulnerable, for example, if they are disabled, then they will pay less tax on this form of trust.
  • Non-resident – a trust with trustees who all live outside of the UK, which can mean a lower rate of income tax for the beneficiary.

Setting up a trust

You should always seek advice from a solicitor or financial adviser when setting up a trust. They will take you through the process and ensure that no mistakes are made.

An adviser can help you to:

  • Identify your key assets
  • Approach trustees
  • Identify the beneficiaries
  • Activate the trust

Although the assets are yours, you’ll need to choose people you can rely on to be your trustees. You should ideally choose at least two, and no more than four.

Roles within a trust

For your trust to be effective, it’s important that you know what functions each role has and how to choose the right people for the job.

  • Settlor – the initial owner of the assets who decides how to use them through a document called a ‘trust deed’.
  • Trustee – the legal owner of the assets held in trust, responsible for daily management, tax and distribution in accordance with the settlor’s wishes.
  • Beneficiary – a person or group which benefit from the trust, through the income, capital or both.

Ending a trust

Although it is a legal entity, there are steps that you can take to end a trust arrangement.

A trust may be ended by:

  • The death of the beneficiary
  • The beneficiary reaching a certain age
  • The decision of a trustee

You should always consult a solicitor to ensure that you or another trustee are acting legally and within the definition of the trust. They will be able to advise you and help you to keep accurate records.

Support for trustees and beneficiaries

When setting up a trust, you need to be mindful of the legal and financial implications of doing so. For example, you may end up owing a lot of tax if you do not set up the trust correctly.

It’s important to get professional advice from an experienced financial adviser before you set up your trust.

TWP Accounting cater to all types of trusts through expert advice, accounting, reporting and tax assessments. For more guidance, please contact our team today.