In this article, we will be discussing the different types of Trusts that can be applied when you are looking at putting your affairs in order.
When is it a good idea to set up a Trust?
Trusts can be used as a way of protecting your assets and inheritance for your loved ones and future generations. We want to help you to protect your hard-earned assets from the risk of inheritance tax and care home fees or future marriage if your partner survives you. We can also help you to provide for your children or loved ones by creating a Trust where there may be for example;
- Children under 18 (minors)
- Children going through financial difficulties such as bankruptcy or divorce proceedings
- Children or beneficiaries with long term physical or mental conditions who are either vulnerable or would not be able to handle large sums of money or assets
- Children or beneficiaries who are in receipt of means-tested benefit and they would risk losing their benefit
- A partner/spouse you live with that you want to provide for during their lifetime (for example you may be happy for them to live in your home) but you would like to retain the capital asset as an inheritance for your children
What are the different types of Trusts?
A trust is a vehicle which ensures that the assets included within the trust are looked after by legal owners (the Trustees) for the benefit of the beneficial owners (the Beneficiaries). The Trustees have various duties and the relationship and obligations between the Trustees and the Beneficiaries is fiduciary.
Trusts are usually classified according to their method of creation or the reason for their existence. There are various classifications of trusts and we will outline a few in this article.
Lifetime Trusts created in a Settlement
During our lifetime, we may choose to create a Trust to gift assets as a way of reducing liability for inheritance tax or so that we can provide for children if a child has a disability or for charity. This may be done informally for example by opening a bank account for a child or formally by way of a Trust Deed.
Lifetime Property Trusts
During our lifetime, we may co-own a property with other people as Tenants in Common. There may be various reasons as to why the property is held in this way. The co-owners can own in different percentages and usually will have prepared a Declaration of Trust which sets out the proportions they own.
During our lifetime, we may own a property in our sole name but during the breakdown of a relationship, a partner may have spent substantial amounts of money on the property or helped pay the mortgage. If so, an implied Trust could be created which gives the partner a beneficial interest in the property.
Express Trusts created on death by a Will
There are a number of Trusts which can be created on a person’s death by their Will. The most common is a Trust created by parents for children under 18 or under 25 if they want to delay payment. A parent may also wish to create a Trust for a disabled or vulnerable adult child or to protect an inheritance from being taken into account in a child’s divorce or bankruptcy.
Pre-death estate planning
A person may wish to provide for their spouse/partner for their lifetime to give them present enjoyment but to protect an inheritance for their children or other beneficiaries or to minimise inheritance tax risks. These are:
Right to Occupy
This gives a person (a life tenant) a right to occupy a property for a fixed period of time. Once that period has expired, the asset will pass to the ultimate beneficiaries. The property may be a specific property or may permit a sale and purchase of a different property to allow for downsizing.
Life Interest Trust
Life Interest Trusts include the above Right to Occupy in a property but it could also refer to an interest in other assets eg investments/shares. In addition, the life tenant is entitled to keep any generated income for example rent or interest from the assets included within the Trust. Capital may only be spent by the life tenant with the consent of the ultimate beneficiaries.
Flexible Life Interest Trust
This Trust is the same as a Life Interest Trust but also gives the Trustees over-riding powers to give capital to the life tenant. This is popular with married couples who want full flexibility to provide for one another but affords protection of assets from potential risks. This Trust can include the property, but also any assets that are held in the deceased’s sole name. This is useful for example if a person has a substantial amount of money in their own name and ring-fenced. On the death of the survivor, what remains of the Trust funds is distributed to the ultimate beneficiaries.
Discretionary Trusts
The Discretionary Trust has similar flexibility to the Flexible Life Interest Trust. However, instead of the life tenant being one particular person, it has a class of defined beneficiaries who the Trustees can choose to benefit from the Trust. None of the beneficiaries has an automatic right to receive anything from the Trust. The Trustees have the discretion to provide income and capital to any of the beneficiaries. The Trustees are usually assisted in this task as they are provided with a Letter of Wishes which explains how the deceased expected the Trust to operate. This document is guidance only and is not legally binding.
A discretionary trust is often used where there are vulnerable or disabled children or where a person wants to benefit future generations and keep money in the family.
How can we help?
During our Will appointment, we take full details of your assets as well as yours and your family’s health and circumstances so that we can give you bespoke advice regarding Inheritance Tax and the appropriateness of each type of Trust. We want to ensure that your loved ones are secure in the future and that you have peace of mind that your wishes will be fulfilled.
If you would like to discuss any of the above you can contact us by using the form below or calling one of our offices.
Frequently Asked Questions About Trust Wills
A Trust is a vehicle which ensures that the assets included within the Trust are looked after by legal owners (the Trustees) for the benefit of the beneficial owners (the Beneficiaries).
Trusts can be used as a way of protecting your assets and inheritance they can e used for protetecting your assets from the risk of inheritance tax, care home fees or future marriage if your partner survives you.
A Trust can help you to provide for your children or loved ones. It is worth considering a Trust if your;
– Children are under 18 (minors)
– Children are going through financial difficulties such as bankruptcy or divorce proceedings
– Children or beneficiaries with long term physical or mental conditions who are either vulnerable or would not be able to handle large sums of money or assets
– Children or beneficiaries who are in receipt of means-tested benefit and they would risk losing their benefit
– A partner/spouse you live with that you want to provide for during their lifetime (for example you may be happy for them to live in your home) but you would like to retain the capital asset as an inheritance for your children
Trusts are usually classified according to their method of creation or the reason for their existence. There are various classifications of trusts which are;
– Lifetime Trusts created in a Settlement
– Lifetime Property Trusts
– Express Trusts (created on death by a Will)
– Life Interest Trust
– Flexible Life Interest Trust
– Discretionary Trusts
The Right to Occupy is created through a Life Interest Trusts and it gives a person the Right to Occupy a property for a fixed period of time. Once that period has expired, the asset will pass to the named beneficiaries. The Right to Occupy can also permit a sale and purchase of a different property to allow for downsizing.
A Discretionary Trust is usually assisted with a Letter of Wishes which explains how the deceased expected the Trust to operate. However, none of the beneficiaries has an automatic right to receive anything from the Trust. The Trustees have discretion provide income and capital to any of the beneficiaries. A Discretionary Trust is often used where there are vulnerable or disabled children or where a person wants to benefit future generations and keep money in the family.
