Trust Funds

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.

Can I put my house in a trust?

If you’d like to ensure your property stays in the family after you pass away, putting it into a trust could be a good idea. This will allow for the house to be managed and distributed as you would wish. It also helps to protect the property from probate and tax expenses.

Putting your house in a trust means that you will no longer have control of the property. This will fall down to your chosen trustees, who will manage and maintain the property on behalf of your selected beneficiaries.

What should I consider when choosing a trustee?

Whoever you choose as a trustee should be someone you can trust completely. People will often pick family members or friends. But you could also appoint a professional, such as a solicitor.

If you’d like someone close to you to act as a trustee, we would always suggest speaking to them first. They will need to have the time, energy and skill to be able to do the job properly. So it’s always best to ensure they’re comfortable with taking on the role.

Similarly, if you’d like to appoint a professional to act as a trustee, make sure to do your research before going any further. We can help you with this. Our solicitor firms are experts in this area, and we’ll support you in choosing the one that’s right for you.

Can a trustee be a beneficiary?

It’s not uncommon for beneficiaries to act as trustees, and there is no rule against this. But you should consider whether the individual will be capable of acting in a way that is fair and in the best interest of all beneficiaries, not just their own.

You might also consider appointing other trustees who are not beneficiaries. This additional perspective could help to make things more balanced and objective when it comes to making major decisions.

I’d like to set up a trust – what should I do?

If you’re thinking about setting up a trust, we can help you access the legal support you need. Whether you need help deciding which trust is best for you, or you’d like to find out more about the tax benefits of setting up a trust, our solicitors are here to provide expert advice.