What is a trust?
A trust is the formal transfer of assets to one or more people, known as trustees. The trustees are legally responsible for managing the assets on behalf of beneficiaries - people who benefit from the trust.
The details of the arrangement are set out in the trust deed. Trusts aren't new- far from it! In fact, Trusts were first mentioned by Homer circa 650BC. In the UK, their origins can be traced back to the Norman Conquest of 1066, after which
the common law of England was created. There are various types of trust. Some take effect during the lifetime of the settlor
- the person who sets up the trust. Others become active on the death of the settlor and are referenced in their will.
This information only covers trusts established during your lifetime.
Different types of trust have different advantages and
disadvantages for the settlor and beneficiaries, and different legal responsibilities for the trustees.
Why use a trust?
You'd use a trust to ensure that assets you originally owned are managed for the benefit of other people - the beneficiaries. Doing this protects the assets because they're not legally owned by the beneficiaries. That way, they can't be eroded if the beneficiaries get divorced, go bankrupt, or are subject to claims from creditors.
If beneficiaries need long-term care in the future, assets held in trust cannot be assessed to pay for that care.
Another good reason to set up a trust is to ensure that an inheritance is managed on behalf of a vulnerable beneficiary. Because assets in the trust don't add to their estate, it won't impact their entitlement to benefits.
Finally, because assets in trust don't add to a beneficiary's estate, they won't form part of their estate for inheritance tax purposes.
Who can set up a trust?
Almost anyone over the age of 18 can be a settlor. A nominal
amount of, say, £10 can be settled to trustees in the first
instance. Further amounts can be added during your lifetime oron your death.
Most commonly, trusts receive assets on your death, as
directed by your will.
Who can be a Trustee?
Trustees are legally obliged to manage assets held in the trust.
They must abide by the arrangements in the trust deed and adhere to trust law.
Guidance for trustees often comes in the form of a
Memorandum of Wishes sent to executors of your will. By following these instructions, they decide which beneficiaries should benefit and by how much.
Decisions by trustees must be made unanimously. This is why it's often helpful to appoint a professional trustee to provide support and guidance to the others.
Does a trust have a bank account?
Yes. This is normally done when assets are settled into the truston death.
The bank would need appropriate identification for all trustees and may charge admin fees for setting up the account.
Do trustees need to meet?
Yes, and the law says they must meet regularly.
However, if there is only a nominal amount in the trust initially, there would be no need for regular meetings. When the estate passes into the trust on death, trustees would need to meet regularly to manage the assets.
Do trustees need to inform HMRC?
Yes, this needs to happen on death when assets are settled into the trust. Trustees must inform HM RC of the assets and
whether any tax is due. After that, trustees must make an annual tax return to HMRC and pay the appropriate tax from trust funds.
Are trusts listed publicly?
No. That's one of the advantages - your financial affairs are kept private because there is no publicly accessible register.
How long does a trust last?
In England and Wales, the trust's lifetime - known as the
perpetuity period- is 125 years. In Scotland, the period is
80 years. A trust is wound up by distributing all of its assets absolutely to the beneficiaries, as directed by the trust deed.
One consequence of this is that the assets add to a
beneficiary's own estate. On their death, their estate could be subject to a bigger for inheritance tax bill.
In addition, assets passing to beneficiaries are no longer
protected against future divorces, bankruptcy and other
creditors, and claims for long-term care.
One way around this is to settle all this assets into a new trust before the end of the perpetuity period. The same trustees can be appointed to manage the new trust and the assets will still be protected.