A trust is where money or other assets are held on behalf of somebody else (known as a beneficiary). The beneficiary could be a child, an adult who lacks capacity to manage their own affairs or an organisation, and the funds held in trust could be to pay for a child’s education, to fund a house deposit or to make grants available to a local community.
Trusts usually involve three main elements:
There are different types of trusts that all have different rules and approaches to how the trust shares income and capital held in it. Some more common types of trust include:
Bare trusts are held in the name of the trustee. However, 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 allow the beneficiary to receive income generated from the trust, without having ownership of the assets themselves. Usually, the person has the right to the income from the trust and/or use of the assets (e.g. live in the house) for a set period of time, often their lifetime. When that trust ends, the assets pass on to someone else.
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. The trustee will have control over how to use the trust assets, though there will normally still be a set of rules or deed that states the decision they can make.
You can read more about the different type of trusts on the HMRC website.
The best type of trust is one that meets your wishes and personal requirements. There is no one type that is best as such. However, Flexible Life Interest Trusts are very popular in Wills and due to the tax treatment of trusts, while Discretionary Trusts are very common when setting up trusts in lifetime.
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.
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 a tax-planning strategy. It also offers the chance to give away an asset but with conditions attached, such as the gift can only be accessed at a particular age. However, bear in mind that once placed in trust, the settlor usually can’t get the items back if they change their mind, so it’s vital to be confident that this is the right course of action.
It’s a personal decision and could depend on a whole range of factors, from how much you’re hoping to leave in a trust to the potential tax implications. The rules around trusts are very complicated and it’s always wise speaking to a qualified financial adviser before you decide.
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, which allows them to manage these on behalf of the beneficiary. However, trustees cannot use this money for their own purposes.
They’re there to represent the beneficiary’s best interests and must conduct their decisions with the highest possible care and to the best of their abilities. If there’s more than one trustee, they all have equal status and access to the trust account.
Trustees must be clear about how the trust operates and cannot do anything outside of its rules and purpose – they have a legal duty to manage the funds in accordance with both the law and the terms of the trust.
All trustees need to make sure their records are accurate and keep accounts for at least six years (though preferably for the lifetime of the trust). They must also make sure that the trust pays any tax that is required.
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. Trustee savings accounts permit trustees to open and manage a savings account on behalf of a third party or beneficiary.
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, or 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 their funds while these are held in a trust.
Banks and building societies may offer specific accounts to be used in trust, while others offer their standard accounts that allow management by a trustee. Banks and building societies give trustees full access to managing trustee savings accounts.
Strictly speaking you do not need a lawyer to create a trust. However, it may be wise to appoint a solicitor to set it up and verify the deed, in order to ensure that it’s legally binding and there’s no ambiguity – the rules around trusts can be very complicated and there can be significant tax consequences if you get it wrong. Therefore, it is always sensible to take professional advice beforehand.
You’ll then need to open a specific trust account to hold the funds and/or assets. 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 trust will have set parameters for when beneficiaries can receive funds. This may be upon reaching a certain age, the funds are being used for a certain purpose or as part of being awarded a grant by the trust.
Beneficiaries cannot access the funds held in trustee savings accounts and trustees cannot give permission to 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.
Parents can act as trustees for their children’s savings. If a child earns more than £100 in interest in any tax year, then any excess will be taxed at the parent’s rate of income tax (though this doesn’t apply to Junior ISAs).
The Trust Deed will usually say what happens if a trustee dies and what the process is for appointing new trustees. It is common for the surviving trustees to be given the power to appoint new trustees.
It is always sensible to take professional advice when creating trusts, particularly as the rules around them are very complicated. Usually, a solicitor would create a trust and their fees often range from a few hundred pounds up to several thousand pounds depending on the type of trust required.
However, there may be yearly fees to consider as well. Whether or not there is a fee depends on how the trust is managed. The general position is that non-professional trustees are not entitled to charge a fee for acting as trustees. However, professionals (such as solicitors) are entitled to charge a fee. This is often a fixed fee or an hourly rate. The fees are payable from the trust fund.
Anyone can set up a trust fund. 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 can put into trust provided there is an identifiable ‘object’ of some type, whether this is shares, money or property. This is because to create a trust, there must be an ‘object’ to be subject to the trust. If the intention is to create a trust and add to it later, it is quite common to place £10 into the trust to start it.
A Trust Fund usually refers to the money or assets held within a trust whereas a Trust Account usually refers to a bank account held in trust.
Trusts can avoid taxes in a number of ways. For example, creating a lifetime trust can ‘remove’ assets from your estate if you survive for seven years after making the gift. Creating a trust in your Will can mean you pass assets to beneficiaries without it forming part of their estate when they die, which can avoid Inheritance Tax on their estate. It is very important to take professional tax planning advice when using trusts as part of a tax mitigation strategy.
A family trust means different things to different people. The most common example is a discretionary trust where the members of a family (including their descendants) are named as beneficiaries. This can be a very good way of protecting assets long term, as events such as divorce or death of beneficiaries should not affect the funds in trust. Whether a trust is ‘worth it’ depends on an individual’s circumstances and what they are trying to achieve. An independent financial adviser will be able to advise on whether a family trust is appropriate for you.
Funds in a bank account can be placed into trust and it is very popular to place cash assets into trust. The starting point when placing assets into trust is to consider what it is you wish to achieve. An independent financial adviser will then be able to advise on the suitability of placing funds into trust and the type of trust that is appropriate to achieve your goals.
Moveable assets such as cars can be placed into trust, but caution must be exercised as placing a physical asset into trust can cause many problems. For example, if there is no cash in the trust, who pays for repairs or tax? If you are considering placing a car into trust, it is important to make sure there is cash available to cover running expenses. In most cases when cars are placed into a trust, they would usually be just one component and not the sole item.
Important matters to consider include its intended use (is it part of a collection or will it be used daily?), the reason for placing it into trust (is it to enjoy it during your lifetime then pass it on to a museum or is it to keep it in the family long term?) and the financial side (running and insuring the car).
It is very popular to leave a house in trust in your Will due to the many advantages offered. For example, if you wish to give the surviving spouse a home to live in for their lifetime but do not want them to have control over what happens to your share of the house if they meet someone else after you die. This can give protection to the inheritance as the survivor would not have control over your share of the house and you can effectively ringfence it for your children.
Placing your house in trust during your lifetime is less popular as it doesn’t have many benefits compared to the pitfalls. For example, if you give away your house (into trust) but still live in your house, then in most circumstances it would still form part of your estate for Inheritance Tax. It can also be seen as a ‘deliberate deprivation of assets’ by the local authority in relation to means-tested care fees so it is very important to take professional advice before making any decision about placing your house into trust.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.