We are often approached by clients considering placing assets into Trust. Trusts can be a good way of protecting family assets and providing for beneficiaries, and can be set up during a person’s lifetime (a ‘Lifetime Trust’), or indeed, on death through their Will (a ‘Will Trust’).
Trusts can be set up for many reasons including managing family assets, safeguarding assets for a vulnerable or minor beneficiary and providing for a class of beneficiaries such as grandchildren.
This Blog focuses on Lifetime Trusts.
Setting up a Lifetime Trust involves the person creating the Trust, known as ‘the Settlor’, transferring assets (which could be property, shares or cash) during their lifetime to others known as ‘the Trustees’, to look after and manage for the benefit of others, known as ‘the Beneficiaries’.
Before creating a Lifetime Trust, you should ensure that doing so is the right approach for you – and we would encourage you to seek advice from your Accountant or Financial Planner initially, who would review your personal and financial circumstances to establish whether a Trust is right for you and whether you can afford to part with cash or assets in the long term.Once you have gifted assets into a Trust, you can no longer have the benefit of those assets.
Broadly speaking, there are two types of Lifetime Trusts which are commonly put in place; ‘a Life Interest Trust’ and ‘a Discretionary Trust’.
A Life Interest Trust is used where a person wants to provide an income for a named person for the rest of their life and then on their death the capital value of that assets should pass to different beneficiaries.For example, income from a share portfolio could be paid to your only son for his lifetime and on his death the share portfolio passes to your grandchildren (who would be the ultimate or future Beneficiaries).
Discretionary Trusts are used where a person might wish to provide for a class of beneficiaries, such as grandchildren or where there is a vulnerable beneficiary who may not be able to manage their own money. Funds in a Discretionary Trust are managed at the discretion of the Trustees so that they can decide which beneficiaries benefit from the Trust and when. A Letter of Wishes would usually accompany the Trust and express the wishes of the Settlor on how they would like the funds to be managed/distributed, although this is not legally binding on the Trustees. Grandparents often set up a Discretionary Trust for the benefit of their Grandchildren’s education, as this has tax advantages.
All Trusts have tax consequences, and these vary depending on the type of Trust created and you should seek advice from your Accountant before setting up a Trust.
Should you have any questions in relation to creating a Trust, please do not hesitate to get in touch.