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What Exactly is a Trust?

There are many words and phrases you hear all the time without really knowing what they mean. The world of law is no exception. You’ve almost certainly heard of ‘executors’, ‘stamp duty’ and ‘trusts’ but unless you work as a legal professional, or have had a relevant personal experience, are you sure you could answer the following questions in any detail?

31 March 2017
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What does the ‘executor’ of a will actually do?

Why do we pay ‘stamp duty’ when we move house?

What exactly is a ‘trust’?

Let’s take a look at that last question.

On the most basic level, a trust is a legal arrangement whereby someone (known as the ‘trustee’) named as the owner of assets (such as property or money) is actually holding and managing those assets for the good of one or more beneficiaries. The person who puts the assets into the trust is called the ‘settlor’.

More than one trustee can be responsible for managing the assets held in a trust and the settlor can also be a trustee. Trustees can change but there must always be at least one trustee.

We’ll look at different types of trust in a moment but first let’s look at reasons for setting up a trust. Why not just give the assets to the beneficiary? Perhaps the beneficiary is currently too young to manage their own financial affairs or perhaps the beneficiary, although an adult, is somehow physically or mentally incapacitated. Or the settlor might only wish to pass on the assets after his or her death, as part of inheritance planning, in what is called a ‘will trust’.

Different types of trust are taxed differently, which will probably influence the settlor’s decision on which type of trust to create. The most common types include:

  • bare trusts: the beneficiary has the right to all the capital and income (interest earned on money, for example) at any time as long as they are 18 or older (in England and Wales) or 16 or older (in Scotland). Bare trusts are particularly suitable for passing assets to young people, as the trustees manage the assets until the beneficiary is old enough to take possession;
  • interest in possession trusts: the trustee must pass on all the income from the trust to the beneficiary (minus expenses) as that income arises. For example, a wife (the settlor) creates a trust to manage her shares, stipulating that if she dies before her husband, the dividends (the income) generated by those shares will go to her husband (the beneficiary) for as long as he lives. When he dies, the shares themselves will be passed to their children. The husband therefore benefits from the shares but never actually owns the shares;
  • discretionary trusts: the trustees can make decisions on how to use the income from, and sometimes the capital in, the trust. Trustees might, for example, decide which of multiple beneficiaries should receive a particular payment, how often payments are made or whether any conditions should be imposed on the beneficiaries;
  • settlor-interested trusts: the settlor, or the settlor’s spouse or civil partner, is also a beneficiary. A settlor-interested trust might, for example, be an interest in possession trust or a discretionary trust;
  • non-resident trusts: the trustees are not resident in the UK for tax purposes. The tax rules for non-resident trusts are highly complicated;
  • mixed trusts: different types of trust are combined. Each part of the trust is addressed according to the tax rules that apply to that specific part.

Trusts can be very complex, particularly when considering tax implications. Taking advice from your solicitor is highly recommended. A well-executed trust will bring peace of mind to the settlor and might, of course, bring great wealth to the beneficiary.