What is a Trust and why create one?

Published by Reshan Ragunathan on 14 June 2022

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Background

An ‘express private trust’ is where an individual (the settlor) transfers property to chosen trustees to hold for the benefit of a set of nominated beneficiaries.

Where this takes place the legal ownership of the property is usually transferred to the trustees, and they have a duty to use these assets for the beneficiaries. The terms of how the trustees may regulate enjoyment of the property by the beneficiaries will normally be set out in the Trust document (which is typically a Trust deed or the Will of the settlor, both of which must be drafted by a suitably qualified legal professional).

The settlor may nominate any person with mental capacity to act as a trustee and in many cases act as trustee themselves alongside a professional. This ensures the settlor has oversight on how the trust is run. Under the terms of the trust, the trustee may also retain the right to appoint or remove trustees/beneficiaries from the trust in the future.

Reasons for creating a Trust

Safeguarding property for Younger Beneficiaries

While beneficiaries are too young or not yet capable to either manage property/funds responsibility or not legally of age to hold the property in their own name, a trust enables the trustees to retain control over how and when the beneficiaries benefit from the trust property e.g. by payment of school fees or assisting with the purchase of a first home.

Protecting vulnerable persons

Where a settlor seeks to assist a vulnerable or disabled person (e.g., that may not be capable of managing their own finances) then if certain conditions are met a Disabled Person’s Trust may be created. This allows the trustees to assist the beneficiary at their discretion and at the appropriate times. Such a Discretionary Trust will not usually impact any means tested benefits the beneficiary receives and is treated more favourably for tax purposes compared to other types of trust.

Succession of Property

Gifting property away outright means the donor loses all control over those assets, as well as who ultimately benefits from the property in the future. As an alternative, placing assets in trust can, for example, protect against them leaving the family e.g. on remarriage or where difficulties in family relationships arise. One option to achieve this would be to settle property into trust for the use of the settlor’s spouse during their lifetime, with the assets passing to the children after this.

Tax advantages

Property that remains in one’s estate at their death may be subject to a rate of Inheritance Tax (IHT) of 40%. But placing property in Trust can result in a much-reduced rate of IHT. In addition, this will also ensure that any future growth in the value of the property (which can often be significant e.g. for residential property) will not remain in an individual’s estate and be subject to a potential IHT death rate of 40%.

The settlor may also suffer income tax at the higher or additional rates of 40% or 45%. Where this is the case, gifting income bearing assets into trust for beneficiaries on a lower level of income may lead to a considerable income tax saving annually

These are just some of the reasons why an individual may create a trust but the reasons and benefits of doing so will depend on each individual’s personal circumstances,

If you are interested in finding out more if creating a trust might be suitable for you then contact a member of our experienced and dedicated Trust team.

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