The Society of Trust and Estate Practitioners (STEP) have recently produced a report on the ‘Social and Economic Benefits of Trusts’ which, among other issues, looks at the way that trusts are used, often in our every-day life, in respect of pensions, life assurance, to set up charities and to protect family businesses. It is often assumed that trusts are being used to hide substantial funds offshore of are just for the super rich; this is the eye catching news in the media. But, as the report points out, trusts were first used in this country centuries ago; they have many common and practical uses nowadays and are mostly used for very practical purposes. I will set out below some of the most common reasons people use them in Wills and Succession matters.
The definition of a trust and their uses
A trust is a financial relationship whereby A transfers assets to B to manage on behalf of C. A is usually known as the settlor, B is the trustee (often more than one) who manages the trust assets for the benefit of C (the beneficiary or beneficiaries) who may be alive or exist now or may not yet be born.
Why would you want one or when might you use one
- In a will (will trusts) where A would be the Testator (the person making the will), B would be the executor who would become the trustee of the will trust and C would be the beneficiary/ies of the will trust. They would be commonly used to:
- a. Protect children from inheriting when they are too young to be able to manage money or assets for themselves. A child cannot give a good receipt for assets before they are 18 and are not permitted to own land before that age. But even 18 may be considered too young to inherit. So a will trust might be set up so that the children inherit at a later age, say 21 or 25 and the Trustees manage the funds for their benefit in the meantime.
- b. Protect those with an incapacity who may never be able to manage assets for themselves and need help and protection. This may be for a child or an adult with a mental or physical disability. The will might include a disabled persons’ trust which has a number of tax benefits or a discretionary trust, which offers a lot of flexibility.
- c. Provide a more limited form of interest such as a right to income only during the beneficiary’s lifetime, but not the capital, which would be passed on to the Testator’s chosen beneficiary/ies when the first beneficiary dies. This sort of interest is often created out of property which is owned by a couple who have children from a previous relationship. They may want to ensure that their spouse can stay in the house during their lifetime (often referred to as a life interest trust) but be sure that their share of the house passes to their own children ultimately.
- d. Provide flexibility as the Testator’s circumstances might change between the date they make their will and their death, or the beneficiaries’ circumstances might change. A discretionary will trust over part or all of the estate would allow the Trustees to be able to decide what is the best thing to do with the funds at the relevant time. The discretionary trust would name the people or classes of people who are to be the potential beneficiaries. Usually, the Testator will leave a letter of wishes with the will setting out the factors they want the Trustees to take into account when making their decision. In a scenario where the spouse and children are the potential beneficiaries, this might be that the spouse is the person to be considered as the main beneficiary but subject to that and what her needs are and the funds that are available to her, as much should be given to the children as possible.
- e. To make use of or preserve tax exemptions. Possibly to protect a third nil rate band allowance in a situation where someone has been widowed twice and has ‘inherited’ two other nil ate band allowances. Also, if there are private company shares and a spouse exemption, to avoid part of the business property relief being lost, a trust may be a useful vehicle to hold the shares.
- Succession and tax planning
- a. Parents or grandparents may want to pass on assets during their lifetime for tax planning purposes, but ensure that the children do not have full control of them. This might apply particularly to shares in a family company where they may not want the children to be able to make decisions that affect the company or sell the shares. In that case, the shares may be held in a trust for their benefit.
- b. Grandparents in particular may want to provide for their grandchildren’s education and set money aside for school fees or university costs. They will not necessarily want (or be able) to give the money direct to the children and so putting it into a trust can safeguard the money for that purposes only.
- c. Protecting children against bankruptcy or relationships that go wrong – providing funds for a child’s benefit but via a trust means that the trust owns the funds and not the child.
These are just some of the many examples where trusts may be used, mostly for security, control and protection. They have been around for hundreds of years and remain very useful to this day.
If you would like to read the full STEP article, please follow this link.