Trusts

A Trust is a legal agreement entered into to pass property from the trustor to the beneficiary, under the control or guidance of a trustee. They are commonly used to provide for dependents, leave inheritances, or control the use of a mutual asset.

How do Trusts work?

A Trust is made up of a trustor (the person who is giving the property into the Trust), a trustee (the new legal owner of the property) and the beneficiary (the person the property must be used to benefit).

The trustor will chose to give away some of their property (maybe a house, shares in a company, artwork or other valuable items) to the trustee, who now becomes their legal owner. The trustee must then use the property for the beneficiary as laid out in the Trust agreement. That could be to provide an allowance from the rental income or share dividends, or to provide a lump sum for the beneficiaries first house, or to pass down family heirlooms when married, or to simply hold the asset until the beneficiary is 18 years old.

A Trust has three basic requirements to be legally valid:

  • Intention – there must be clear intention to create a Trust
  • Subject matter – the property in question must be precisely identified
  • Objects – The beneficiaries must be clearly identifiable or at least ascertainable. They can include classes of beneficiaries (all residents of a village), people who are not yet born (future grandchildren) or charitable purpose (medical research).

Why set up a Trust?

A Trust can be set up for any reason, but are most commonly done for the following.

  • To limit Inheritance Tax liability
  • To manage distribution of an estate: It is common for there to be an age limit for a child or dependent to inherit, at 18, 21 or 25
  • To leave a gift to charity under certain conditions
  • To manage the co-ownership of an asset, such as a house
  • For privacy, a will is public once the person who made it has passed away. A Trust will never be public information
  • To manage the money of a dependent who is incapable or unwilling, to doing so themselves
  • As an investment programme in a Unit Trust or pension Trust
  • To manage highly complex corporate structures

How is a Trust set up?

A Trust can either be made when the trustor is alive, after they have passed away or by court order.

A Living Trust is made when a Deed of Trust is drawn up and signed by the trustor and the trustee. This can outlive the trustor, and if provision is made for appointing new trustees, it can survive indefinitely.

A Testamentary Trust is created when the will of a deceased person. This is done automatically by the will, and the executor is normally the trustee, though this can be specified. The will is treated as the trust document for establishing the requirements of the Trust.

A Trust can also be established by court order, normally by the Family Courts or the Court of Protection to secure assets for children or protect co-ownership of property.

Is a Solicitor or Accountant necessary?

A solicitor is not necessary for a Trust to be established, however the law regarding trusts has been developing since the Middle Ages and is incredibly complex. Anyone seeking to create or be party to a Trust should obtain legal advice and tax advice.

Trustees in particular are under a fiduciary duty, and the ramifications of that are far ranging and sometimes difficult to predict.