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Family Trusts?

Family Trusts

The legal definition of a “trust” generally sends lay people and professionals alike into convulsions of fear and beads of sweat, but fear not, well drafted Family Trusts can be a very useful vehicle for protecting not only assets, but also the beneficiaries themselves.

So how do Family Trusts work?

Firstly, the person creating the trust is known as the “settlor”. This is the person who transfers their asset(s) into the trust and details who the Trustees will be and who the Beneficiaries are. The Settlor will also provide the Trustees with various “powers” to deal with the administration of the trust.

The Trustees should ideally be responsible people who have been entrusted to manage the trust funds for the benefit of someone else. The Trustees must act in the best interests of the beneficiaries. In the ideal world, the Trustees should be impartial and have no personal interest in the trust funds. Should Professional Trustees be appointed, it is likely that they will charge for their services. This may seem an expense many Settlors wish to avoid but appointing Professional Trustees will guarantee the trust is administered correctly.

The Beneficiaries are “chosen” by the Settlor and in most situations, it will be descendants of the Settlor (children/grandchildren), but it is for the Settlor to decide as to whom they wish to nominate as Beneficiaries.

The Settlor may determine, within the trust document, which Beneficiaries are to benefit and when (and how much) they are to benefit. However, it is possible that the Settlor may decide to leave these decisions at the discretion of the Trustees.

Once the Settlor has transferred the asset(s) into the trust, they will be managed by the Trustees (who will “legally” own the trust asset(s)). The advantage of this “transfer”, is that should the Settlor exclude themselves (as well as their spouse/Civil Partner and minor children), then the value of the trust would not be regarded as part of their estate for Inheritance Tax (should they survive 7 years from the creation of the trust).

Assets within the trust are also better safeguarded than they would be if a simple gift had been made to the beneficiary. A beneficiary’s own assets, for instance are vulnerable in the event of divorce or bankruptcy. Assets held in trust are not completely immune from such events but are certainly better protected compared to personal ownership.

The Settlor may regard a beneficiary as “vulnerable”, such as being a spendthrift, or they may not have the physical or mental attributes to manage their own affairs. In such instances, placing funds in trust for their benefit may be advantageous, as the Trustees would be in a better position to facilitate payments to the beneficiary.

The term “Family Trust” can have a plethora of meanings, as there are a variety of trusts that may be created by the Settlor:

  • Discretionary Trust
  • Interest in Possession Trust (also known as a Life Interest Trust)
  • Bare Trust
  • Disabled Person’s Trust
  • Will Trust

It is therefore essential that great care should be taken before considering which type of trust is most appropriate for the Settlor (and also the beneficiaries). Advice on the creation and implementation of Family Trusts should be sought from either a qualified Lawyer or Accountant, so there are no unwanted surprises for the Settlor, the Trustees or the beneficiaries.

If you would like to discuss any of the above, please do not hesitate to get in touch with the Private Client team -  0800 84 94 101