Demystifying trustsApril 02, 2018
The word “trusts” often evokes Dickensian images of quill pens, old fashioned deeds and of the case Jarndyce v Jarndyce, which was immortalised in the novel “Bleak House”. Many of you will also recall the “entail” in the television series “Downton Abbey” which was the unlikely matchmaker in the union of Matthew and Lady Mary.
There is a common misconception that trusts are solely for the use of the very wealthy. Trusts are available and accessible to all people and should be considered by all families. They allow people to protect their assets and control how they are used after they have been given away.
The person who creates the trust is known as the “settlor”. The person who manages the trust is known as the “trustee” and the person who benefits from the trust is known as the “beneficiary”.
When to consider a Trust?
Trusts can be created during your lifetime and upon your death. When you put assets into a trust, you can set out in the trust document how those assets are to be dealt with. The trust document, which will specify who will benefit and to what extent should be drawn up by a suitably qualified professional, who will know how to achieve your desired outcome.
Ensure your wealth is spent wisely
You may wish to give away some of your wealth to benefit other members of your family but you may be concerned that this will be dissipated. A trust can restrict the amount and type of benefit received from the assets placed in trust. For example, you may wish to assist a grandchild with university expenses but you would not want them to spend the money on a fast car. A trust is the ideal vehicle to achieve this end.
A Trust can also allow your trustees to adapt to the beneficiary’s personal and financial circumstances, as they arise in the future. If you make an outright gift to someone you cannot change your mind and give it to someone else but certain forms of trust offer a high degree of flexibility.
Which Trust is best?
Trusts fall broadly into two main categories:
- Life Interest Trusts: under this form of trust, someone is entitled to the income (i.e. dividends, rent, interest etc.) for their lifetime or other specified period, but on their death or some earlier event, someone else will inherit the capital of the fund. This sort of trust is popular in the wills of people marrying for the second time, where there are children from a former marriage. It will ensure that the spouse is provided for, but that the children of the former marriage do not see their parent’s wealth passing to the children of the surviving step-parent. In addition, many people set up life interest trusts within their Wills to help with protection against assets being unnecessarily taken into account to pay for future care fees.
- Discretionary Trusts: these trusts give the trustees power to distribute income and capital at their absolute discretion to any one or more of a stated class of beneficiaries. This is the most flexible form of trust because if the personal circumstances and/or the financial needs and resources of any beneficiary change and they require more or less money from the Trust Fund, then the trustees can manage the trust so as to reflect this. Discretionary Trusts can also provide a measure of asset protection on the divorce, death or bankruptcy of a beneficiary and as a means of controlling a financially immature’s beneficiary’s access to funds. Moreover, if a beneficiary is in receipt of state benefits or local authority care, the trust can use funds to benefit the beneficiary but the value of the fund should not be taken into account for means testing purposes.
Special trusts for disabled beneficiaries
Special trusts can also be used to benefit disabled beneficiaries and they can also be used to keep life assurance benefits from being subject to tax whilst also ensuring that the lump sums are payable immediately on death without any possible delays otherwise created by the probate process. Many grandparents will often set up a Bare Trust to help future generation’s school and university fees or to support a property purchase.
Trusts for property purchases
Trusts are often created following purchase of your home. If you and your spouse/partner have made unequal contributions to the purchase price of the property (for example, one of you has paid the deposit and the other has not, or, you intend to make unequal contributions to the payment of the mortgage and/or expenses), then you should hold the property as “tenants in common” and you will need to reflect your contributions by a Declaration of Trust. If you fail to do this, then you may lose the initial contribution that you have made to the purchase price.
Personal Injury Trusts for compensation
If you receive damages for a personal injury or clinical negligence then that compensation may reduce or even stop your present and future entitlement to means-tested benefits. However, if you create a Personal Injury Trust, the DWP and local authority will not take into consideration the value of the trust fund when determining your present and future entitlement to means tested benefits. The trust can even protect your right to local authority payments for long-term care.