Trusts Explained

Trusts are a valuable tool with many uses when it comes to life-changing events. Many people, often without realising it, will come into contact at some point in their lives with a trust in one form or another. Yet trusts are widely misunderstood and often seen as the preserve of just the wealthy.

In principle, a trust is a very simple concept - the formal transfer of assets to a small group of people with instructions that these are held for the benefit of others. The individual or couple who establishes and puts assets into a trust is usually known as the ‘settlor’. The people asked to control the assets and oversee the trust are called the ‘trustees’ and those who benefit from the trust the ‘beneficiaries’.

Details of the arrangement are usually laid out in a ‘trust deed’ and the assets placed in the trust are the ‘trust fund’. The distinctive feature of a trust is the separation of legal and beneficial ownership of the assets in the trust fund. The trustees are the legal owners of the assets, but the trustees must at all times put the interests of the beneficiaries above their own.

There is a wide-range of different types of trust, each with different tax rules and purposes, depending, for example, on how the benefits of the trust fund are to be distributed. The basic principle that a trust contains assets owned by someone for the benefit of someone else remains true in all types of trust.

The advantages of using a trust

A trust allows an individual or couple control over the assets they place in it - giving the settlor greater confidence in how assets will be used in the future. Put simply, trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Trusts are particularly useful when planning how money and assets should pass from one generation to another, especially when family structures are complicated by divorces and second marriages.

They also offer a useful way to save Inheritance Tax without having to make an outright gift to another person. If assets are placed into a trust from which the settlor cannot benefit, after seven years the assets will fall outside of their estate for Inheritance Tax purposes. Any growth on the assets will immediately be outside the estate. Trusts can also help to avoid probate delays - as Inheritance Tax and probate fees must be paid prior to the distribution of assets in line with a Will. Executors of a Will cannot access assets until probate is granted and therefore must find the money for this from elsewhere. As a trust is separate from the estate, trustees have immediate access to any money held within it and may use this to pay these dues.