A trust is a legal arrangement that allows assets such as property or money to be looked after for the benefit of the beneficiaries named in the Will. Trusts are often used to hold assets for children until they are old enough to receive them.

In order to set up a trust, you will need to hire a solicitor. This section provides an introduction to the basic principles of trusts, which you will help you to prepare for a more detailed discussion with your solicitor.  

On this page:

• Why trusts are used
• Saving Inheritance Tax with a trust
• Types of trust
• The role of trustees
• Appointing trustees
• Winding up a trust

Why trusts are used

There are various situations in which a trust may be set up, and not all of them are related to making a Will. For the purposes of making a Will, trusts are usually set up for one of the following reasons:

• To hold assets on behalf of a child until they reach the age of 18. Doing so allows for the property or money to be properly managed until the children are old enough legally to take possession of it. Some types of trust allow the beneficiary to receive an income from the property.
• To reduce the Inheritance Tax liability. Putting assets into trusts can in some cases reduce or even eliminate the inheritance tax liability for that asset; it can also help to keep the value of the estate within the nil-rate band.
• To provide for your spouse while keeping the estate intact to be passed to your children.
• To protect the family home from being sold in order to pay for residential care.

For advice on how a trust could work in your specific circumstances, you should speak to a legal or financial professional.

Saving Inheritance Tax with a Trust

Some people decide to set up a trust during their lifetime, and pay money into it on a regular basis. They can appoint themselves as a trustee and will have control over the money held in the trust. The law considers money held in a trust as separate to that of your estate, so the value of your estate is lowered, which means that less inheritance tax is payable.

When setting up a trust there are three main people who will be involved: a settlor, a trustee and a beneficiary. The settlor puts money, property and other assets into a trust, under which they are managed by the trustee, until they are handed down to the beneficiary, after the settlor has passed away.

When writing a Will, a testator will need to include details of the trust and exactly what is to be paid into it. It is also necessary to designate a trustee and beneficiary. In some cases, it may be best to state when the trust is to pass to the beneficiary, perhaps when they reach eighteen years of age. Once the settlor of the trust has passed away and the requirements laid down in the Will have been fulfilled then the trust can pass to the beneficiary.

Types of trust

There are different types of trust designed to meet different kinds of needs. The type of trust you use will depend on who the beneficiaries are, what the assets are, and how and when you want the assets to be distributed. The main types of trust are:

• Fixed Trusts, in which the beneficiaries are named and the proportions for how much to pay to each one are clearly stated.
• Discretionary Trusts, in which the beneficiaries are named but the Trustees have the power to decide how much to give to each, according to circumstances.
• Interest in Possession Trusts, in which the beneficiary, such as a spouse, can use the asset when they are alive but must pass it to another named beneficiary, such as a child, when they die. This type of trust is sometimes used to ensure that one's spouse is provided for, while keeping the estate intact to pass to one's children. Interest in Possession Trusts have less beneficial tax rates than discretionary trusts.
• Accumulation and Maintenance Trusts, which are usually used to provide an ongoing income for children, to cover living costs, school fees and so on. These trusts attract enhanced tax rates, but they also have some complex rules and restrictions, and it is wise to seek the advice of a solicitor and/or accountant when establishing or managing such a trust.
• Protective Trusts, in which the beneficiary can receive income from the Trust while the capital remains protected. This type of trust is usually used for beneficiaries who are bankrupt or likely to become so.
• Trusts for Disabled Beneficiaries, which are discretionary trusts with special tax exemptions for beneficiaries who are disabled. This type of trust is often used to hold the compensation payments of people who are disabled due to personal injury.

The role of trustees

Trustees are the people who are responsible for administering the trust. This means that they will become the legal owners of the assets covered by the trust, and must manage those assets in the best interest the named beneficiaries, for example, your children. The duties and powers of trustees are defined by law, and include the following:

• The duty to act in accordance with the rules of the trust.
• A statutory duty of care to the trust's beneficiaries.
• The power to make investments for the benefit of the beneficiaries.
• The duty to review investments regularly and take appropriate expert advice on how best to manage them.
• The duty to make payments from the trust and to pass the assets to the beneficiary in accordance with the instructions you have set out in the trust deeds.

Appointing trustees

If you choose to establish a trust, you must appoint the trustees in your Will. In most cases, you may appoint your executors as trustees. If you are also appointing guardians for your children, there can be some benefit in appointing one of the guardians as a trustee.

You can appoint between one and four trustees, and it is usually best to appoint at least two. In selecting trustees, ideally you will be looking for someone you know, who has the following characteristics:

• Trustworthy and honest
• Some experience with financial matters
• Has the beneficiary's best interests at heart
• Can be reasonably expected to outlive you

You may choose to appoint alternative trustees in your Will, who would take on the responsibility if your original intended trustees pass away.

The trust can be set up to reimburse the trustees for reasonable expenses. It is also possible to appoint professional trustees who are paid fees out of the fund. However, this option is not popular as it means that funds that would have passed to the beneficiaries are used up in professional fees.

Winding up a trust

When the primary beneficiary of the trust dies, any remaining trust assets can be distributed to other named beneficiaries, or to charity if preferred, according to the instructions given in your Will.