Trust  

The benefits of setting up a trust

  • Describe the different types of trusts
  • Learn about the key advantages of setting up a trust
  • Identify the different situations in which trusts can be useful
CPD
Approx.30min
The benefits of setting up a trust

There are many reasons and many circumstances where a trust might be of benefit.  

It is a relationship in which one or more people (the trustees) holds and manages assets for the benefit of one or more other people (the beneficiaries).  

First, let us consider the different basic types of trust:

Bare trust

A bare trust is essentially a nominee arrangement whereby the legal title is held by the trustees for the beneficiary who is the absolute beneficial owner of the assets. The beneficiary is entitled to demand that the legal title is transferred to them, provided that they are over 18.  

Bare trusts are most commonly seen when a parent or grandparent wants to make a gift to a young child, and where there are several owners of a particular asset but not all of them are the legal owners.

Discretionary trust

In a discretionary trust, the trustees have complete discretion to decide when to distribute income or capital, and to which of the named beneficiaries.  This is the most flexible type of trust, and the trustees’ powers are very wide. For that reason it is essential to choose the trustees carefully.

Life interest trust

The life tenant of a life interest trust (also known as an interest in possession trust) is entitled to all income arising and/or is entitled to live in and enjoy any property owned by the trust.  Often, the trustees will also have overriding powers to benefit a wider class of beneficiaries.  On the death of the life tenant, or if their interest is terminated earlier, there will either be ongoing trusts or outright gifts for other beneficiaries.

But why should you have a trust and what are the benefits?  

Below are some of the key advantages and considerations:

Tax

While tax comes first in this list, it is rarely the main driver for establishing a trust.  In making major changes to the taxation of trusts in 2008, the government seemed to be under the impression that trusts were primarily a vehicle for avoiding tax.  While there can undoubtedly be tax efficiencies of trusts in certain situations (some of which are described in more detail below), usually the starting point for creating the trust is rather different.  

Tax is, however, a major consideration whenever an individual (the settlor) establishes a trust, not least because there are a number of pitfalls to avoid.  For example, the vast majority of trusts created during the settlor’s lifetime will suffer inheritance tax (IHT) at 20 per cent to the extent that the assets being transferred into the trust exceed £325,000.  Often, the perceived tax “benefits” of a trust are simply mechanisms to avoid the settlor or beneficiaries ending up in a worse position in comparison to direct personal ownership.