What is a trust account?

What is a trust?

A trust is where money or other assets are held on behalf of somebody else, known as a beneficiary. The beneficiary of the trust fund could be a child, an adult who lacks capacity to manage their own affairs or in some cases an organisation, and the funds held in trust are typically designated for a specific purpose. For example, the trust could specify that the funds must be used to pay for a child’s education, to fund a house deposit or to make grants available to a local community, but the terms can vary.

Trusts usually involve three main elements:

• The settlor. This is the original owner of the assets and the person who puts them into a trust and decides how they should be used.
• The trustee. This is the person who manages the trust (there may be more than one) on behalf of the beneficiary.
• The beneficiary. The person (or people/organisation) who stand to benefit from the trust.

What are the responsibilities of a trustee?

Trustees act on behalf of the beneficiary to invest and manage their money and assets. They are the legal owners of any funds or assets held in the trust, but they cannot use this money for their own purposes, and are instead there to represent the beneficiary’s best interests – they have a legal duty to manage the funds in accordance with both the law and the terms of the trust. They’re required to make sure their records are accurate, and must ensure that the trust pays any tax that is required.

Reasons for setting up a trust

A trust can be a great way to protect assets (which could be money, land, buildings or investments) and ensure they’re spent responsibly. They’re often set up by parents wanting to leave money behind for their children, but by placing the money in a trust, it needn’t matter if the beneficiaries are too young or otherwise unable to be financially responsible – the funds can only be spent as and when the trust specifies, and will be looked after by the trustees until then.

A trust can also be used to pass on assets before the settlor dies, as a form of living inheritance, and can be used as part of an effective tax-planning strategy. However, bear in mind that once placed in trust, the settlor usually can’t get their assets back if they later change their mind, so it’s vital to be confident that this is the right course of action.

What is a trust account?

A trust account – otherwise known as a trustee savings account – is an account that’s set up purely to hold the funds left in trust. Trustees are allowed to open and manage an account on behalf of a third party or beneficiary, and there may be a couple of options to choose from. For example, some banks and building societies may offer specific accounts for funds held in trust, while others offer their standard savings accounts that allow management by a trustee.

How do trust accounts work?

These accounts have rules about how the account is managed and accessed. For example, trustees could choose that any single trustee can make transactions to the trustee savings accounts, that all trustees will need to give their permission to the bank or building society before any transactions go ahead, or that a minimum number must agree. The beneficiary cannot access the funds while they’re held in a trust, and they’ll need to meet the conditions of the trust before funds can be released.

How to set up a trust account

There are several steps involved in opening a trust. You’ll need to decide upon the assets to include in the trust, appoint the trustee(s) and specify the beneficiaries, along with any conditions that will need to be met before they can access the funds. You’ll need to create a ‘trust deed’ to outline the exact terms, and will need to open a suitable trust account in which to hold the funds and/or assets. You may also need to register the trust with HMRC.

In order to open the specific trust account you’ll need the trust deed and appropriate identification for all parties involved, and will normally need to complete an application form with your chosen provider. You may also need to provide a copy of the Will and grant of probate, if applicable.

The basic process sounds simple enough, but in reality it can be incredibly complex. You don’t technically need a solicitor to create a trust or set up a suitable trust account, but it may be wise to appoint one – it’s a complicated area of law and the wording must be precise, so having a solicitor to set up and verify the deed to ensure that it’s legally binding and free from ambiguity is highly recommended. Make sure to take professional advice beforehand.

How much do trust accounts cost?

The costs involved in trust accounts are primarily to do with setting it up in the first place. As mentioned, taking professional advice when creating trusts is highly recommended, so much of the cost would go towards the solicitor’s fees for setting up the trust. This can range from a few hundred pounds to several thousand pounds or more for highly complex cases, but you can typically expect to pay around £1,000-£2,000. There may also be yearly fees for management of the trust to consider as well, though this will depend on how the trust is managed.

Types of trust

There are different types of trusts that all have different rules and approaches to how the trust shares any income and capital held in it. Some common types of trust include:

Bare trusts

Bare trusts are held in the name of the trustee on behalf of someone else (the beneficiary). The beneficiary has the right to the assets held within it (and any capital/income generated) from the age of 18 in England and Wales and 16 in Scotland. These trusts are often used for children, with the trustee managing the assets until the beneficiary reaches the required age.

Interest in possession trusts

Interest in possession trusts allow the beneficiary to either receive income generated from the trust or have use of the asset without having ownership of the assets themselves. This type of trust is often used for property, where the individual has the right to use the asset – or in this case, live in the house – for a set period. When that trust ends, the assets pass on to someone else, with this kind of trust often used to pass down wealth and/or property down the generations.

Discretionary trusts

Discretionary trusts allow the trustees to make specific decisions about how income and capital from the trust is used, such as what gets paid out and to whom, and any conditions that need to be imposed. However, there will normally still be a set of rules that states the decisions they can make.

You can read more about the different type of trusts on the HMRC website.

Who can set up a trust?

Anyone can set up a trust. It’s more commonly used by those with significant assets, but anyone who wants to pass on assets is eligible to set one up. There is no limit on how much or little you place into trust provided the object/s are identifiable, such as shares, money or property.

Tax implications of trusts

The tax implications can be different depending on the type of trust, but there will generally be income tax to pay on any interest generated from the funds, or capital gains tax if assets are sold or transferred. Who’s responsible for paying the tax again depends on the type of trust and whether it’s been passed on to the beneficiaries, or if it’s still being managed by the trustees. You can find out more about trusts and taxes on the gov.uk website, and always seek professional advice.

Can I set up a trust to avoid inheritance tax?

Many people use trusts as a way to avoid or at least minimise inheritance tax. It can allow them to pass assets onto beneficiaries without it forming part of their estate when they die, which means those assets won’t be included in any inheritance tax calculations. However, this can be a complex area, and it’s vital to take professional tax planning advice to ensure tax mitigation doesn’t become tax avoidance.

Accessing money in a trust

The trust will have set parameters for when beneficiaries can receive their funds. This may be upon reaching a certain age, for example, or when the funds can be used for a certain pre-agreed purpose.

Note that beneficiaries cannot access the funds held in trustee savings accounts, and trustees cannot give permission for them to directly access these funds. Instead, the trustee must either transfer the funds from the trustee savings account to an account in the name of the beneficiary, or transfer the whole account into a personal account in the name of the beneficiary.