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Trusts LawWhat is a Trust?

A Trust is a legal arrangement that allows you to make a gift to someone without giving him or her control over the assets you give away. This is true of anything you put into the trust, be it money, property, investments or a life insurance policy. The terms of the trust are usually set out in a document called the Trust Deed.

The donor (or settlor) creates a trust by giving property (the trust fund) to trustees who hold the property (and income from it) on behalf of one or more persons (beneficiaries).

Why make a Trust?

Trusts are used to avoid or address problems in two main areas: taxation and family matters/asset protection. A trust might be created in the following circumstances:

  • When someone is too young to handle their affairs;
  • When someone can’t handle their affairs because they’re incapacitated;
  • To pass on money or property while you’re still alive;
  • Under the terms of a will;
  • When someone dies without leaving a will (intestate)

Types of Trust

There are a number of different sorts of Trusts but they usually fall into one of the following categories:

Bare trusts

  • A Bare Trust is one where the beneficiaries are named and cannot be changed.
  • Each beneficiary has an immediate and absolute right to both capital and income and has the right to take actual possession of the trust property.
  • You can gift assets to a child via a bare trust, until the child reaches age 18, when they can legally demand their share of the trust fund.
  • Providing the settlor survives seven years from the date of placing the assets in the trust, the assets can pass Inheritance Tax free to a child at age 18.

Discretionary Trusts

  • Most trusts are discretionary trusts, which provide the widest possible powers and flexibility to the trustees as to how they manage the trust and the financial benefits they give to the beneficiaries.
  • Trustees have discretion about how to use the income of the trust; they decide how much income or capital, if any, to pay to each of the beneficiaries.
  • Discretionary trusts are a useful way to pass on property while the settlor is still alive and allows the settlor to keep some control over it.
  • Discretionary trusts are often used to gift assets to grandchildren.
  • Discretionary trusts also allow for changes in circumstances, such as divorce, re-marriage and the arrival of children and stepchildren.

Disabled Persons Trusts

  • There are special trusts, often discretionary trusts, arranged for a beneficiary who is mentally or physically disabled.  They are not liable for the inheritance tax applicable to standard discretionary trusts.
  • Where a trust beneficiary is disabled or ‘vulnerable’, the trustees can get special tax treatment provided certain conditions are satisfied about the nature of the trust and the circumstances of the beneficiary. 

Protective Property Trusts

  • These are normally used to guarantee that your assets go to your children, and not to your spouse’s new husband/wife and their children.
  • The cash tied up in the house can be protected for the next generation without any hardship to the survivor.
  • You normally have to change the way you hold your house. Typically you are “joint tenants” which means the whole house passes directly to the survivor when one dies. You change this to holding as “Tenants in Common”, which means you each own a fixed 50% share of the property. Then you write Wills containing a Protective Property Trust. When the first spouse dies your 50% share of the property is held on trust for the children. In the meantime the survivor is entitled to stay in the property as a life tenant, has security and can even move house if they want to.
  • This means that there is a guarantee the children will inherit at least 50% of the value of the property, which can’t be left to anyone else.
  • Protective Property Trust Wills must be written while you are both still alive and in good mental health

Life interest or ‘interest-in-possession’ trusts’

  • With these trusts, the beneficiaries have a legal right to all the trust’s income but not to the property of the trust.
  • These trusts are typically used to leave income arising from a trust to a second surviving spouse for the rest of their life. On their death, the trust property reverts to other beneficiaries, often the children from the first marriage. 

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