A trust is an arrangement where one person (the settlor) transfers assets to another (the trustee) who manages them for the benefit of someone else (the beneficiary).
Just to make things more complicated, the settlor or trustee of a trust can also be a beneficiary.
To set up a trust, the settlor transfers the legal title of assets to the trustee. The assets cease to be possessions of the settlor, and so are exempt from claims from creditors, bankruptcy cases, family disagreements and lawsuits. The assets can include real estate, cash, stock, shares, artworks, life insurance policies, pension scheme death benefits, or other investments.
The settlor decides how the trustee can manage the trust, and how the wealth will be managed and distributed to beneficiaries – who can be people, entities like a charity or even pets.
Why would I want to set up a trust fund?
There are many reasons for creating a trust fund. They can provide a way to protect and control family assets, to manage wealth on behalf of a child under the age of 18, or for inheritance planning. They can also provide control of spending by someone who may lose the capacity to take care of their finances due to problems with mental or physical health.
Because trusts can be used for many different purposes, there are many different types of trust, here we explain some common examples:
Simple trusts are often used to transfer assets to minors with the trustees simply looking after the assets until a beneficiary comes of age.
A variation– the fixed trust alternatively known as an Interest-in-possession trust, are a little more complicated, and provide income to a beneficiary, while still retaining control of the capital. The trustee transfers all trust income to the income beneficiary for a fixed period or for the rest of their life. Interest in possession trusts are often used to provide for a surviving spouse with the capital passed on to heirs (usually children) when the spouse dies.
Discretionary trusts give trustees the power to decide how to use the trust funds either to distribute as income or capital. The trustees can accumulate the income within the trust if they choose not to distribute it.
Many types of trust exist – and a discussion with your solicitor might be necessary to explain all the possibilities and establish the correct trust.
How can I set up a trust?
You need to specify what you are putting into trust, who will manage it and how, and who will receive it and when. This is more complicated than it sounds, and you will need a solicitor to draw up the documents which set out your intentions.
But your solicitor will not have the expertise you need it when it comes to such matters as investment, money management and tax.
Tax rules for trusts differ between trust types, laws and allowances can change, and understanding all the possibilities as well as the pitfalls of using a trust requires a financial expert.
At Continuum, we can provide the level of expertise you need to set up a trust, and work with solicitors and other professionals to ensure that your wishes are followed in the most tax efficient way.
We keep in touch with the latest tax regulations that affect how trusts can be used. Just as important, we can show you how a trust can form part of efficient estate planning, designed to keep more of your wealth.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate estate planning, wills, tax and trust advice.