A Beginner's Guide to Trusts

A trust is a legal document between a settlor and trustees, where the trustees hold assets that previously belonged to the settlor. The trustees then use these assets to benefit one or multiple beneficiaries. In more simple terms, a trust allows a settlor to gift their assets to beneficiaries via trustees, who are responsible for the gift until it is given to the beneficiaries. The following guide details some of the main features of a trust and explains how to set up a trust and in what circumstances a trust may be relevant and valuable.

Who is Needed to Set Up a Trust?

In order to successfully set up a trust, there are three groups of people required. They are most frequently referred to in the following ways: settlor(s), trustee(s), beneficiary/beneficiaries. The definitions of each group are as follows:

• Settlor: The settlor is the person or people who set up the trust and have the gift to give. The settlor decides who the trustees and beneficiaries of the gift should be.
• Trustee: The trustees are the people that are responsible for looking after the gift on behalf of the beneficiaries.
• Beneficiary: The beneficiary is the person (or people) who will receive the gift.

Who Can Be a Trustee?

Trustees can be relatives or friends of the settlor, or can be professionals, such as solicitors, insurance companies or accountants. Most settlors choose to have a mixture or professional and personal trustees, with the recommended number of trustees being between two and four. The relative or friend acting as a trustee will usually also know the beneficiary, whereas the professional will have a sound understanding of the legalities of trusts and trust management. By having a mixture of trustee sources, the beneficiary is more likely to receive the most from the gift.

What Are the Responsibilities of the Trustee?

The settlor may have specified a variety of different responsibilities and roles that trustees are to carry out in the trust. Trust laws may further the responsibilities and obligations of the trustee, but for taxation purposes, the following responsibilities apply:

• The trust must be registered with the Inland Revenue
• Maintain records of the capital gains and interest of the trust
• Complete an annual tax return
• Making tax payments on the income and capital gains of the trust
• Supplying the beneficiaries with certificates of the income that they have received from the trust in the tax year and how much tax has been deducted by the trustees.

Why Set Up a Trust?

There are a variety of reasons why setting up a trust might be beneficial and valuable. Often, trusts are arranged by way of reducing inheritance tax bills when the settlor dies. Alternatively, many people use a trust when their gift is to be given to a child, who will be too young to manage their finances. Trusts may also be used by way of gifting to individuals who have disabilities or restrictions in their ability to manage the gift independently, and so a trustee is responsible for the management of the gift, ensuring that it benefits the beneficiary.

Types of Trust

There are various types of trust, but most will commonly fall into the following options:

1. Bare Trusts

Bare trusts are often referred to as ‘simple trusts'. This type of trust enables each beneficiary to have an immediate and full right to the capital and income of the trust. The beneficiaries of the trust maintain the right to take actual possession of trust property. In a bare trust, the trust is held in the name of a trustee, but the trustee is not able to determine the amount of income that a beneficiary receives from the trust. Therefore, in a bare trust, the trustee has no active responsibilities.

2. Interest in Possession Trusts

An interest in possession trust exists when a beneficiary (known as an income beneficiary in this instance), has a current legal right to the income of the trust as it occurs. All of the income received, less trustee expenses and tax, is passed to the beneficiary. The trustees in this instance, depending on the terms of the trust, may be able to pass capital to the beneficiaries, even though theirs is only the legal right to income.

3. Discretionary Trusts

Most trusts fall into the category of discretionary trusts, which give the greatest flexibilities in trust management to the trustees. Trustees have a wider area of options into how to manage the trust and the financial benefits that they give to beneficiaries.

As the title suggests, trustees have greater discretion on how and when to make payments to the beneficiaries. Trustees of discretionary trusts can decide:

• How much to pay beneficiaries
• To which beneficiaries of beneficiary groups payments are made
• How often payments are made
• Any limitations or conditions that are imposed on beneficiary payments.

Trustees of discretionary trusts may or may not be able to receive an income from the trust as long as the law allows it. The settlor may also maintain some management of the trust through a Letter of Wishes. Although this is not a legally binding request, the Letter of Wishes enables a settlor to communicate up to date wishes for the trust.

4. Accumulation and Maintenance Trusts

An accumulation and maintenance trust is a trust that allows beneficiaries to become the recipient of property or the income when they reach a specific age (no more than 25). The income of the trust can be used by trustees for the maintenance of the beneficiaries prior to the beneficiary having possession of the property/income.

Trustees of this type of trust are given the authority to accumulate the income of the trust until a certain time, at which point the beneficiaries will be in receipt of the property and/or income of the trust.