Establishing and managing trusts goes far beyond tax considerations and their benefits. Often, individuals create trusts to safeguard or segregate specific assets or sums of money from the rest of their estates. Trusts can serve various purposes. They can be particularly advantageous when transferring shares within a family company or business to children and grandchildren.
Given the complexity of trust law, it is essential to seek expert advice. Our Private Client team at Sydney Mitchell is equipped to provide expert guidance on trust creation, advice in relation to pre existing trusts and ongoing trust administration and their administration.
What is a trust?
A trust is a legal arrangement where one person the settlor transfers some of their money or assets to another person or persons (the trustees) who hold those assets for a specified person or group of people (the beneficiary or beneficiaries).
For example, a grandparent opens a bank account shortly after the birth of their first grandchild. They deposit £500.00 into that account. The grandparent is the settlor, and holds the account as trustee for their grandchild, who is the beneficiary.
In the UK, the majority of trusts need to be registered with the Trust Registration Service (TRS).
Creating trusts is not purely for the purpose of tax mitigation , for some people it is important to protect or ring-fence assets.
One example is where a parent might want to set aside some money for all of their children but might have concerns about a child who is easily influenced or has poor money management skills. They might consider creating a trust to hold funds and create it in such a way that it allows the trustees to have the a level of discretion such that they can release funds only when they think fit and in the most appropriate way. An example of this is where the trustees might be advised to only pay or transfer trust assets for specific purposes, such as education costs. Another could be to provide a deposit toward the purchase of a home or indeed to purchase a property for the beneficiary to live in which could be held in the name of the beneficiary or in the names of the trustees, for added protection.
A parent concerned about their child’s relationship with drugs or alcohol, might provide guidance to trustees to only release trust assets directly to another company or institution, for example paying university fees directly to the university or transferring money to a conveyancer to provide a deposit for a house purchase. Alternatively, the trustees may be guided to drip-feed income rather than providing a significant sum of money outright to the beneficiary.
What types of trust are there?
There are many different types of trust including those noted below, which are the most common:
- Discretionary trusts
- Immediate post death interest trusts
- Life interest trusts
- Bare trusts,
- Vulnerable persons trusts
- Pilot trusts
- Personal injury trusts.
Most trusts, are express trusts, which means a trust created deliberately by a settlor, usually, but not always, in the form of a document such as a written deed, a declaration of trust or a will
There are also non express trusts such as resulting trusts, implied trusts and constructive trusts.
Trust creation
People consider creating a trust for many different reasons. For some it is about inheritance tax planning, whereas for others it might be to make financial or housing provision for a vulnerable or disabled loved one. Some people create a trust as part of succession planning for their business but for others a trust could simply be a receptacle for a personal injury award.
As part of our advice service, we will advise you on the suitability of each type of trust structure for your particular circumstance, which will inevitably involve consideration of the tax implications. When you are comfortable with the type of trust you want to create, we can then draft the appropriate documents for you.
You might already have been advised by your accountant or financial adviser that you should consider creating a trust for a specific purpose. If you wish to do so, we can prepare trust documents for you as a ‘stand alone’ piece of work without duplicating the advice that you have already received (and paid for!).
We will also advise you on the implications of creating a trust, including ongoing compliance aspects such as completion of tax returns and registering the trust on HMRC’s Trust Registration Service.
Trust administration
Once a trust has been created it becomes a legal entity and its trustees have legal duties that they must comply with. A trustee owes duties of honesty and integrity to the beneficiaries of the trust. They must act exclusively in the best interests of the beneficiaries and be actively involved in decision making. They must set aside any personal interest they might have in the trust when acting in their role as trustee.
Trustees duties include adhering to the terms of the trust, ensuring the trust’s compliance of with tax and legal requirements and maintaining accurate records such as trust accounts.
Trustees must also ensure that the trust is registered on HM Revenue & Customs’ Trust Registration Service (TRS) unless an exemption applies. They are also responsible for ensuring that the trust’s registration is kept up to date when any changes occur.
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