If you are considering setting up a family trust, it is important to know your options. Here our wills and probate solicitors list the various types of trusts and explain the differences between each.
What is a Trust?
Put very simply, a trust fund is a way to help protect your assets and guarantee that your loved ones have financial stability for their future. Crucially, a trust can help to avoid hefty inheritance tax and make sure that the majority of your money, shares and equity are passed on in the most efficient way. It can also provide safe and secure protection for vulnerable individuals who may have a disability, learning difficulties or financial issues that they cannot control.
Trusts often mean that although you may be placing money/property somewhere you have no right to access the money or the property, you can still retain control over how the assets are used.
Trusts can be set up during your lifetime, where you can act as the trustees and control what happens to the assets you have gifted. They can also be set up in your will to deal with the protection of assets after your death.
These are most commonly used where you may be worried about the impact of care home fees, the divorce of a child or the protection of disabled or vulnerable members of your family.
There are several different types of trust that can be used depending on the amount and type of assets in the trust and how it will be used.
Why Use A Trust Set-Up In Your Lifetime?
There are many perks to using a trust over a will, but some of the most common reasons to choose a trust are:
- To support someone who can’t manage their money
- To provide for people under 18, who is not legally allowed to inherit
- To help provide managed funds to the mentally ill or people who aren’t good with money management
- To protect wealth
- To protect against potential divorce or bankruptcy
- To bypass inheritance tax - ensuring that your loved ones receive the maximum amount possible
- To split the benefits
- Unlike with a will you can specify and tailor who benefits from your assets to a very in-depth level. For example one beneficiary may be able to live in a property but if sold the money can go to a different beneficiary
Does A Trust Avoid Probate?
Potentially, yes. By placing your assets into trust, the assets are controlled by the trustees. This could therefore override the need for probate, allowing the estate to be paid directly to a beneficiary.
In order to ensure this process runs smoothly, the trust will need to be set up with professional help and advice while the individual in question is still of sound mind.
Read more: How to Limit Your Inheritance Tax Bill
The Types of Trust
- Bare Trusts
Bare trusts provide for assets to be held in the name of trustees, albeit that the beneficiary has a right to the capital and income at any time assuming that they are over 18 years of age and live in England or Wales.
These trusts are commonly used to pass assets on to young people when they reach their majority.
- Interest in Possession Trusts
These are also known as Life Interest Trusts or IIPs and are often useful in the following circumstances:
A will may provide for a spouse to be provided with a right to the income of an estate with the children to receive the estate following the death of the surviving spouse. This means that, for the remainder of the spouse’s life, they will be entitled to all income generated by the estate and this could include: dividends, bank or investment income, or a rent from property or the ability to reside in it.
They have an interest in possession in the income but not the capital itself - hence them often being described as a ‘life tenant’. Upon the death of the surviving spouse, the assets in the trust will be passed on to the capital beneficiaries and the trust will cease to exist.
This trust works slightly differently in that a trustee must pass on all trust income to the beneficiary as it arises, and it will be will be subject to tax according to the life tenant’s personal income tax rate.
Discretionary trusts are managed by trustees who are required to make decisions about both trust income and capital. The trustees will be charged with making decisions concerning provision and distribution from the trust including how often payments are made, the amounts of any payments and the identity of the beneficiary.
This type of trust is typically used for future needs or for beneficiaries who aren’t able to deal with the management of any provision themselves, for any reason.
This is where a number of different types of trusts are combined.
- Settlor-Interested Trusts
Settlor-interested trusts allow a spouse or civil partner to benefit from the trust through an interest in possession, accumulation or discretionary format.
This trust should be used for tax purposes if the trustees are not UK based.
The types of trusts included in your will are the same types as listed above, but only come into effect after you have died and will depend on your circumstances. These should be discussed when considering all aspects of future and estate planning
How to Set Up a Trust?
If any of the above points sound like something you are likely to benefit from then a trust could be the right choice for you. You don’t need to have any special commendations to be applicable for a trust, so if you’d feel as though a trust would benefit you more than a will then talk to your solicitor today.
Setting up a trust is a very precise process that needs to be carefully worded and checked for any legal loopholes. To set up a trust, it's vital to employ the services of a specialist solicitor.
At Howells Solicitors, we have years of experience in dealing with all legal aspects of wills, probate and asset management. If you’re thinking about setting up a trust, then talk to our friendly team of experts today.
