How do trust funds work?
Trust funds are a great way to help provide for your loved ones, protect your assets – such as property, savings and shares – and reduce inheritance tax.
In basic terms, a trust is a way of dividing the ownership of an asset into two parts: the ‘legal’ ownership and the ‘beneficial’ ownership. Trusts that people use for estate planning usually involve three different parties:
- The settlor
- The trustees
- The beneficiary/beneficiaries
You set up the trust up when you (the settlor) transfer assets to the trustees, who then hold the assets in trust for the beneficiary or beneficiaries.
What are the different types of trust?
There are many different types of trust in the UK, all with different rules and advantages. Some of the main types of trusts include:
- Accumulation trusts
This is similar to a discretionary trust, but the trustees will be allowed to generate income within the fund until the beneficiary is legally entitled to the proceeds. - Bare trusts
Also known as a ‘simple trust’. In this case, the beneficiary gains full access to the income and assets that the trust generates. - Discretionary trusts
Trustees are legally considered to be the owners of a discretionary trust. This means they are required to run the trust with the best interests of the beneficiary in mind. - Interest in possession trusts
These are trusts where the trustee must pass on any trust income to the beneficiary as it generates (barring any expenses). - Settlor-interested trusts
If you know that you may become incapacitated one day (through illness, for example), you can use this type of trust to set aside assets or funds to support yourself later on, or to provide for your spouse, civil partner or children.
You could also set up a trust for your children, as long as they’re under 18 and have never been married or in a civil partnership. There is no trust specifically designed for this purpose, but a solicitor could help you choose the type of trust that works best for your situation.
How to set up a trust
Setting up a trust is actually quite straightforward. You can either open one now, or write a trust into the terms of your Will.
But despite the ease of the process, it is highly advisable that you seek professional advice beforehand. This will help you to maximise a trust’s benefits and ensure everything is done correctly.
To make a trust legally binding, you must clearly state:
- When the trust becomes active
- Who the beneficiaries and trustees are
- What assets the trust holds
By instructing a solicitor who is experienced in estate planning, you’ll have the reassurance of knowing all the legal requirements are met. So there will be one less thing to worry about.
How much does it cost to set up a trust?
It’s understandable that you might be concerned about the cost of setting up a trust. But you shouldn’t let this put you off.
In the UK, instructing a solicitor to set up a trust will typically cost around £1,000. While this might seem expensive, using the services of a solicitor could actually save you money in the long term. This is because they will ensure that no costly mistakes are made in the setting up of your trust.
It’s also worth considering the tax benefits that making a trust can provide. In the right circumstances, you may even be able to recoup the initial cost of setting up your trust.
