What is a Trust?

A trust is created when there is a formal transfer of assets (such as property, shares or simply cash) is made by an individual known as the Settlor which allows another person or people to benefit from the trust assets, known as the Beneficiary.  The trust assets are transferred to Trustees to hold for the benefit of the Beneficiary.

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A simple example of this is when parents or grandparents are concerned that children and grandchildren are at risk if they receive or inherit too much when they are too young. In such circumstances, they can create a trust to hold the assets until the children are older and more capable of managing the money for themselves.

Once the assets are in a trust they will be managed by the Trustees for the benefit of the Beneficiaries.

Why set up a Trust?

Trusts can be set up for a number of reasons such as: -

• To control and protect family assets.
• When a beneficiary is unable to manage their assets themselves i.e. because they are too young or they are disabled or incapacitated.
• Under the rules of inheritance, if somebody dies without a Will.
• Tax planning.

A trust can be created within a Will or within the lifetime of the Settlor.  Broadly speaking, these will have the same effect although there are some different tax consequences depending on whether the trust is set up within a Will or during the lifetime of the Settlor. 

A common reason for using a Will trust is to avoid inheritance eventually passing to someone such as a subsequent spouse or even someone completely unrelated to the Settlor.  If the surviving spouse remarries but fails to make reasonable provision for existing children in a new Will there is a risk that children will not inherit anything, and that the entire estate will pass to a new spouse or some other individual.  In this situation, a Will trust can be used which allows the surviving spouse to continue living in the family home or benefitting from the assets, but the property will eventually pass to their children upon the surviving spouse’s death. 

A further reason why someone may wish to set up a trust is to ensure that they benefit family members but are concerned that their assets may be vulnerable to third parties or frivolous beneficiaries.  A trust can therefore restrict the amount and type of benefit received from the trust property.  As discussed above, an example of this would be that a grandparent may wish for a grandchild’s trust fund to be used for their education or to purchase a property but not wish for the trust fund to be spent on holidays and cars.  A trust can therefore protect the trust property from the beneficiaries themselves or from a third party.

How does the Trust Work?

The Settlor decides how the assets in the trust should be used and these are set out in a document known as the Trust Deed.  Wills can also act as a Trust Deed when they contain trusts within them. 

The separation of the legal ownership and beneficial ownership is the unique characteristic of the trust concept; Trustees are the legal owners of the trust property in that they are responsible for managing the trust assets, but the beneficial owners (or the true owners) are the Beneficiaries. The Trustees owe duties to the Beneficiaries; in particular they have a fiduciary duty to put the beneficiaries’ interests first, above their own. Therefore, the Trustees cannot just spend the trust property as they wish, and decisions must be carefully thought out.

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The day-to-day management of the trust property is the responsibility of the Trustees however if the trust is set up in the lifetime of the Settlor as opposed to within the Will the Settlor may also choose to appoint themselves as a Trustee.  This will allow the Settlor to have some control over the management of the trust. It is important to note that once the assets are in the trust the Settlor should usually not benefit from it themselves.

A trust may also allow Trustees to adapt to the circumstances and create an element of flexibility.  If an individual makes an outright gift of property, they cannot change their minds and give it to somebody else.  Ultimately, there are many different types of trusts that can be set up depending on the individual circumstances and advice should be sought at the earliest opportunity to establish whether a trust would be suitable.

How can we help?

At Jackson Lees, we have a wealth of experience in supporting family Trusts and estates, assisting with all aspects of initial advice, trust administration, structure, preparation of accounts. For a free consultation with a member of our legal team call us on 0151 282 1700 or email enquiry@jacksonlees.co.uk or visit our website www.jacksonlees.co.uk.