What is a Trust?
A trust enables a ‘settlor’ to give away assets, but on terms that they will be dealt with in a certain way – usually to benefit their children or other members of their family.
Legally, ownership of the assets (the trust property) passes from the settlor to the trustees of the trust – the trustees become the owner of the assets, instead of the settlor. However, the trustees must look after the assets according to the terms of the trust set up by the settlor. These will say who the trustees are, identify the beneficiaries (the people entitled to benefit from the trust assets and/or income generated from them) and how the trust is to operate.
The trust can provide that different beneficiaries may receive different benefits from the trust. For example:
- A settlor might want assets to pass to a child, but not until the child is older. They can be held on trust for him until he reaches the age specified in the trust.
- A settlor might want assets to eventually pass to the children, but to ensure that their spouse can benefit from them for the rest of his or her life.
A settlor can set up a trust during their lifetime (under a deed of trust), or can provide for a trust to be set up in their will, to take effect on their death. Some settlors also write a ‘letter of wishes’, which gives guidance to the trustees on how the settlor would like them to administer the trust assets. This is not legally binding, but can be helpful to the trustees if the trust is a discretionary trust, ie the deed gives the trustees wide-ranging powers to decide how the benefits are to be shared out.
Trustees do not normally benefit from the trust but can be specifically named as beneficiaries. Trustees can claim expenses from the trust and professional trustees can claim their professional charges.
The trustees have a legal duty to act fairly, balancing the interests of different beneficiaries.
Types of trust
There are many different types of trust, which are used in different circumstances.
A bare trust is a simple form of trust where the beneficiary is absolutely entitled to the trust property (provided the beneficiary is 16 (age 18 in England or over and mentally capable). Bare trusts are often used to hold investments for children (and for adults who wish to hold shares anonymously – as it is the name(s) of the trustee(s) that appear in a company’s register of shareholders, and not the beneficiary’s name).
Under an interest in possession trust, a beneficiary is entitled to the net income of the trust – the trustees must hand over all the income after expenses and taxes. These are often used in wills, to give a spouse (or another dependent) an income for life. Once the spouse has died, the assets pass to the children.
A discretionary trust is one where the trustees have more discretion over how they distribute income and capital. For example, several children might be the beneficiaries of a discretionary trust, and the trustees could provide money to each child as they need it (eg to pay for their education).
An accumulation and maintenance trust is a special kind of trust set up for the benefit of a group of grandchildren. These are becoming less common since changes to the tax rules in 2007 eliminated their tax advantages.
A variety of other kinds of trust can be set up for specific purposes. Flexible discretionary trusts are often the best way of achieving the desired results