To a lot of people the concept of a trust carries an air of mystery.
According to Canada Life’s most recent IHT survey trusts were the second most unpopular estate planning tool, with 40% saying they had no intention of using them.
Nineteen percent said setting up a trust was too time consuming or complicated when, in reality, it is a straightforward inheritance tax planning strategy and presents an opportunity for advisers to discuss IHT matters with their clients.
So, what exactly is a trust? It's a way of arranging property for the benefit of other people without giving them full control over it.
An individual, referred to as a settlor, sets up a trust and puts assets (for example, cash, stocks and shares, or investment bonds) into the trust – known as ‘settling’ property.
Although assets are added to the trust when it is set up, the settlor can also add assets at a later date. But care should be taken before adding new assets to an existing trust.
Within the trust deed the settlor should appoint ‘trustees’ - these may be individuals (the settlor can be one if they want), or companies acting as professional trustees.
On their appointment the trustees take over the legal ownership of the trust property and are the people or entity responsible for managing the assets the settlor has transferred into the trust.
They cannot use it as their own personal property; they must use it for the benefit of the beneficiaries.
Beneficiaries are the people or entities that receive the benefit from the property within the trust. They might benefit from the income from the underlying investments or property or they may benefit from the capital, such as an investment bond, or be able to benefit from both.
In every trust there is this division of property – legal title is held by the trustees and beneficial title is held by the beneficiaries.
Trustees can either be a professional such as a lawyer or a trust corporation or non-professional like a family member. But the duties are the same.
Trustees have the task of managing the trust on a day-to-day basis, paying any tax that may become due, and deciding how the assets should be invested.
Any person can act as a trustee, provided that they are over the age of 18 and have full mental capacity. By appointing a trust corporation you have the added advantage that, unlike an individual, it cannot die.
However, the flip side is that they will charge for their services and these fees will be paid from trust assets, reducing the money available to the beneficiaries.
The job of the trustees is to hold the trust property and administer it for the beneficiaries, as directed in the trust provisions.
They must make sure that everything they do with the trust property is done for the benefit of the beneficiaries and is authorised by the terms of the trust. The trust deed will usually give the trustees specific powers to deal with the trust property.