The following is a brief resume of the the nature and use of trusts. Professional advice should be sought when setting up such instruments to ensure the suitability and efficacy of each case.

Trusts:

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FAQs

What is a trust ?

It is a way of choosing who will receive the benefit of certain assets without giving full and immediate control over them. A trust is created by a document, the trust deed, which names the people involved and sets out the terms of the trust. Trusts are recognised throughout the UK but different rules may apply depending upon whether you live in England & Wales or Scotland.

What is involved in setting up a trust ?

The person creating the trust is known as the settlor. The settlor provides the asset of the trust, which is then known as the trust property.

People who manage the trust are called the trustees. Trustees are appointed by the settlor. With most trusts the settlor automatically becomes a trustee and so can keep some control over the assets put in trust.The duties and obligations of the trustees are wide ranging but essentially the aim is to manage the trust property for the benefit of the beneficiaries.

Beneficiaries are people who you wish to receive the benefit of the trust property. They have rights to the trust funds and to make sure the fund is being managed with their interests in mind. If the trustees break the terms of the trust, the beneficiaries may take legal action against them. beneficiaries can be identified individually by name or by being described as a class of people e.g. "the children, grandchildren or great grandchildren of the settlor".

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Can I benefit from the trust ?

Some allow you to, whilst others do not. You may only benefit from the trust if it is specifically provided for within the trust. In some circumstances you may have to pay tax if you are a beneficiary.

Can I change the beneficiaries ?

May trusts are flexible and give trustees the ability to change the beneficiaries. This can be a useful feature if your circumstances change or you change your mind about who you want to benefit. if a trust includes this facility, the people who you may appoint will be set out in the trust deed. However, only those people who fall into one of the classes of discretionary beneficiary in the trust deed can have benefits appointed to them. Although due thought should be given to the discretionary beneficiaries when the trust deed is completed, you are able to nominate new discretionary beneficiaries in writing to the trustees. If you change a beneficiary it could affect their liability to inheritance tax if they die.

Who do I appoint as trustee ?

As the name suggests, a trustee should be someone you trust e.g. another family member, a close friend or family solicitor. Trustees must be over 18, mentally able,and must not be bankrupt. Trustees must accept their appointment for it to be valid. In accepting their appointment, trustees must carry out certain obligations and duties, so the position must not be taken lightly. Please ask us if you require more information about the duties of trustees.

What assets can I put under trust ?

Almost any asset can be put under trust. This covers cash, shares or real property such as house or land. Trusts are also often used with life assurance policies.

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Why should I put assets under trust ?

There are many advantages available which will depend upon circumstances. The main ones being:

Getting money in the right hands

A trust places obligation on the trustees to ensure that the asset value goes to your appointed beneficiaries

Getting money when it is needed most

If an asset is not under trust when you die, your personal representatives (the people you have asked to deal with your estate after you die) will need to get the appropriate "Grant of Representation" before they can deal with that asset. This is known as "probate" in England & Wales, or "confirmation" in Scotland.

Probate is the legal process of confirming who can deal with the estate of a person who has died before the assets of the estate can be distributes according to the terms of his or her will. If someone dies without leaving a will they are said to have died "intestate". Their estate will be divided according to the "laws of intestacy". This can be a lengthy process and can take several months. In the meantime, potential beneficiaries e.g. family , could be suffering financial hardship following such a death.

By placing assets under trust, the need for probate can be avoided as long as there is one surviving trustee upon death. This is because the trustees are the legal owners of such assets. They can therefore deal with the trust property immediately, making sure the chosen beneficiaries do not suffer financially.

This can be particularly important if the trust property is a life assurance policy. One of the most common reasons for taking out life assurance is to provide for family after death. by writing the policy into trust you can ensure that the proceeds of the policy are paid to them without delay.

Tax planning

Trusts can also be used for tax-planning reasons. Inheritance tax can apply to the simplest life assurance policy. This can be avoided by using an appropriate trust. Currently, inheritance tax (IHT) is paid at a rate of 40% on estates valued over £285,000, although gifts between husband and wife are not included.This means that IHT may have to be paid on estates worth less than this once the value of any life assurance policy has been added.

As well as avoiding IHT being charged, trusts can be used to ensure the family has funds available to pay any liability that cannot be avoided. This will negate the possible need to take expensive loans or even sell assets to pay IHT due.

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What sort of life assurance policies can be put under trust ?

Generally, any type of policy may be put under trust although it may not be appropriate to put some policies into trust. Most term assurance or whole of life policies would probably benefit from being in trust for reasons given earlier if they are intended to provide money for your family when you die. Many Capital Investment Bonds would also benefit. However, a policy written purely to repay a mortgage would not be written into trust if it was to be assigned to the lender. However, you may be able to transfer a benefit to the lender where the policy contains several benefits and you only plan to use one of them to repay the mortgage.The right trust will depend upon why you were taking it out and who you would want to benefit from it.

Do I have to take out a new policy to put it under trust or can I use an existing policy ?

Both new and existing policies can be placed under trust.

How do I place a policy under trust ?

It is essential that the chosen trust matches your wishes exactly. Most companies offer standard wordings for the different types which in the main meet most circumstances. However, should this not be the case , it is still possible to draft an individual trust by taking the appropriate professional advice.

Types of trust

The Split Trust

The Split Trust is for protection policies that include death and critical illness benefits together with any other benefits under the policy. The idea is to allow the death benefit to be given to the beneficiaries while still allowing you to have the critical illness benefits, and any other benefits, paid to you if you make a claim.

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The Flexible Trust

This is the basic trust for family protection or IHT planning. The policy holder cannot be the beneficiary. However, the trust has the flexibility to allow a change of beneficiaries if there is a change of mind or if circumstances change.This trust can be used with protection policies and with Capital Investment Bonds to effect a tax-efficient gift of a lump sum. In the latter case the policyholder must still be alive seven years after setting up the trust for IHT not to apply at all to the original sum.

The Family Trust

This is for use with the single premium Capital Investment Bond. The Family Trust gives the settlor a lifetime interest which means access to the policy whilst alive but it does avoid probate if left to named individuals on death. Although initially there is no saving on IHT, three extra deeds are available which you can use to secure savings.

The Long Term Care Trust

This is for use solely with long term care products. It allows you to keep the care benefits due under the policy but place any surrender value, and payments due when you die, in trust for chosen beneficiaries. It helps avoid probate and it can also save IHT when used in conjunction with an extra deed.

The Business Trust

This is specifically designed for business protection policies (partner & shareholder protection). The partner's or shareholder's policy can be written under trust, with the beneficiaries being the other partners or shareholders. in the business.This ensures that surviving partners or shareholders have the funds to buy the deceased or ill person's share in the business and do not end up with an unsuitable partner or shareholder, such as the deceased person's wife or children.

This is fast becoming something of a necessity as more people become increasingly aware of the need to protect their homes if they or their partner have to go into care – whether it’s through accident, illness or old age. A person’s home has always been THE most important financial asset they have, but in the current climate then holding onto that asset is becoming increasingly difficult. If we ever have to go into care for any reason, then anyone who has assets over £22,500 (including the home) will not be eligible for State help. And with annual residential care fees starting in the region of £30,000, then it is increasingly common that the only way people can pay is to use their home and other assets – potentially to the point where there is nothing left to leave spouses/relatives. The PPT is just one product that can be included in a Will to ensure added security for a family.