Under the microscope: do trusts deserve their unpopular status?

If any monies come into the trust, the trustees have a duty to invest it, unless it is being paid out to a beneficiary straight away. Any investment must be authorised by the trust deed and most deeds now contain wide powers of investment.

However, if the deed has no specific investment powers then the investment is governed by the Trustee Act 2000 (England & Wales only).

The act provides the trustees with the ability to make exactly the same type of investment as if they were the outright owners of the trust's assets.

So, the trustees hold the legal title, while the beneficiaries can hold the beneficial title in a variety of ways.

Where a beneficiary holds an absolute interest in the trust asset, which cannot be taken away without their consent, on their death the value of their beneficial interest will become part of their estate to be dealt with either by their will or the rules of intestacy.

It also means that provided the beneficiary is of full age (18 years in England and Wales, 16 years in Scotland) and of sound mind they can demand that the trust is wound up, in respect of the property, from the trustees. 

A beneficiary that is entitled to the income from the trust property for life but cannot receive capital has a life interest. Such a beneficiary is called a life tenant (a ‘liferenter’ in Scotland).

After a life tenant dies, the property passes to the next beneficiaries who are called remainder men. The remainder men only get a full interest after the death of the life tenant; until then their interest is known as a reversionary interest.

Where the beneficiary’s interest is dependent upon a particular event, that beneficiary is deemed to have a contingent interest. An example of a contingent interest is, ‘In trust for the benefit of ‘X’ upon attaining the age of 25’.

Holding the beneficial title to the trust asset gives the beneficiaries certain rights, which can include the right to know that they are beneficiaries, the right to see trust documentation, including the trust deed itself, and the right to see the trust’s financial records.

Trusts are set up for a variety of reasons. Some can prevent young people from getting their hands on assets before the settlor thinks they are ready, other trusts can remove property and investments from the settlor’s estate for inheritance tax purposes. 

Choosing the right one is crucial and this is where seeking professional advice is beneficial.