A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person. Trusts are frequently used to reduce liability for Inheritance Tax and to control what happens to assets after somebody dies.
There are two important roles in any trust – the trustee and the beneficiary. The trustee is legally appointed to manage the trust and the assets in accordance with your wishes. The beneficiary is the person who benefits from the assets.
What Types of Trusts are There?
There are two main categories of trust: will trusts and lifetime trusts. As the names suggest, will trusts are written into your will and become active after you die, while lifetime trusts come into force while you are alive. There are several types of trust, which we’ll come to shortly.
Lifetime Trusts
A lifetime Trust is usually enacted for property or asset protection. Typically, they are used to transfer ownership of your home so that it isn’t counted as part of your estate while allowing you to continue to live in it.
The tax arrangements for lifetime trusts can be highly complex and it’s probably not helpful to describe all of the possible implications here. This is definitely an area where you need expert advice. One word of caution: we don’t recommend using this mechanism to avoid liability for care home fees. Your local authority will probably classify this as deliberate withholding of assets and charge you or your estate for the cost of your care regardless.
Types of Trusts
Here is a summary of the main types of trust.
Bare trusts give everything to the beneficiary immediately as long as they’re over 18.
Interest in possession trusts allow the beneficiary to draw income from the trust straight away. They don’t have a right to the cash, property or investments that generate the income and income is taxable. This is a popular trust structure in the will of a person who remarries after divorce but has children from the first marriage.
Discretionary trusts give the trustees absolute power to decide how the assets in the trust are distributed. For example, you could use this type of trust for your grandchildren and leave it to the trustees to decide how to divide the income and capital. The trustees could be the parents of the grandchildren and can also make investment decisions.
Mixed trusts combine elements from different kinds of trusts.
A trust for a vulnerable person is often used if the beneficiary has a disability or is an orphaned child. The tax liability is usually lower.
Non-resident trusts can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust if they are resident outside of the UK.
Trusts can be highly effective in tax and estate planning. They can also be complex – so it makes sense to talk to a solicitor experienced in this area of work. To discuss the different types of trusts, contact us on 01934 623 501 or send us an enquiry via the Contact page.
