A Trust is a legal arrangement whereby a person (‘the Settlor’) gives assets to other people known as the “Trustees”. The Trustees are made legally responsible for the assets although they are not always beneficially entitled to those assets. The assets are held for the benefit of others (the “Beneficiaries”).
You can set up a trust in your lifetime or in your Will. In either case the Trustees then have to manage the assets on behalf of the Beneficiaries according to the terms of the Will or trust deed.
Trusts can be useful for a variety of purposes:-
There are several different types of trust that can be created but three of the most common types of trusts are set out below:-
A Bare Trust
A Bare Trust or ‘simple trust’ is one where the beneficiary has an immediate and absolute right to both the trust capital and the income received by the trust from that capital. Bare trusts are commonly used to transfer assets to minors. Trustees hold assets for a child until they reach 18. These are particularly useful if you wish to undertake some inheritance tax planning by giving away assets to children or grandchildren but you do not want them to have access to the assets until the age of 18.
A Discretionary Trust
A Discretionary Trust provides the ‘trustees’ are the legal owners of the relevant assets. The Trustees have ‘discretion’ about how to use the income received by the trust and distribute the trust’s capital. The Beneficiaries do not have a fixed right to any particular share of the trust fund. The Trustees have discretion as to:-
Discretionary Trusts are often used to protect assets from third parties in terms of divorce, bankruptcy and care home fees. This is because it is impossible to identify any particular individual as the trust is distributed to a number of beneficiaries at the Trustees discretion.
Discretionary Trusts are therefore often deployed to ensure your loved ones will not suffer financially due to a failed relationship, a troubled lifestyle, an unfortunate disability, or simply from being taken advantage of by others.
A Life Interest Trust
A Life Interest Trust gives a beneficiary the right to income only from assets held in trust for their life time. This Beneficiary is commonly known as the Life Tenant. The Life Tenant does not receive any of the capital from the Trust. The very purpose of a life interest trust is often to ensure that the capital is preserved for a separate intended Beneficiary or Beneficiaries after the death of the Life Tenant.
Life Interest Trusts are commonly used:-
You can specify how you would like the trust to work, for example: