Financial Mortgage Advice

So what is a trust?

A trust is similar to a locked box – it’s safe and holds valuable contents for somebody else’s benefit.


straight copy – neeed to reword and add in seom more (have added in the “types of trust” bit

How do trusts work?

You’re likely wondering what happens to your own or a loved one’s equity release plan when the person who took on the plan passes away.

When you die, the equity release plan is over, the equity release provider must be told about their death and the house must be sold.

This article talks predominantly about lifetime mortgages instead of home reversion plans. If you want to find out exactly what happens to your own or a loved ones equity release plan, then keep reading…

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Who is involved with a trust?

The settlor
The settlor (the truster in Scotland) is the person who establishes and puts assets into the trust. Settlors are usually an individual or a couple. 

The trustees
The trustees are the people who control and oversee the trust. Anybody can act as a trustee as long as they are over 18 and have full mental capacity. Often the settlor will act as a trustee to keep an element of control over the assets. Beneficiaries can also be trustees but this could cause a conflict of interest. If a neutral party is required to act as a trustee, it is also possible to appoint a solicitor. The trustees are responsible for investing the money held in the trust. 

The beneficiaries
The beneficiaries of the trust benefit from the arrangement. For example, they may receive money from the trust or the right to occupy a property. Certain trusts give the trustees discretion over how and when these benefits are given to beneficiaries

How are trusts taxed?

Different types of trust are subject to income tax,
capital gains tax and inheritance tax in different ways.
The rates and allowances vary according to the type
of trust and how the beneficiaries stand to benefit from
it. This can be an especially complex area so you may
want to consider seeking professional guidance

What are the different types of trust

The main types of trust are:

A Bare Trust

With a Bare Trust the beneficiary gains an immediate, absolute right to the assets in the Trust and the income generated.   The person placing funds into the trust (The settlor ) and creating a Bare Trust must be certain that they want the assets in the Trust to go directly to the beneficiary or beneficiaries they choose.   As once this Trust has been set up, the beneficiaries can’t be changed.

interest in possession trusts.

An Interest in Possession Trust entitles the beneficiary to the rights of the Trust income as it is generated, for a set amount of time (usually for their remaining life).  If the beneficiary is entitled to the income for the duration of his or her life, they are known as a “Life tenant.” The capital of the trust usually passes on the death of the life tenant to other named beneficiaries of the Trust.

discretionary trusts.

With A Discretionary Trust, the Trustees have discretion about how the Trust’s income and capital is used. In a Discretionary Trust, the Trustees must run the Trust to benefit the beneficiaries. 

accumulation trusts.

An Accumulation trust is similar to a discretionary trust with the additional responsibility of accumulating the Trust’s income until the beneficiary is legally entitled to the property or the income generated by the Trust.

mixed trusts.

Mixed Trusts are a mixture of several different types of Trusts.  For example, some of the assets within a Mixed Trust could be treated as in an Interest in Possession Trust, while other assets may be treated in the manner of a Discretionary Trust.  A Mixed Trust could be used, for example, for the benefit of sibling beneficiaries who attain legal age at different times.

settlor-interested trusts.

A Settlor-Interested Trust is where the settlor (or the settlor’s spouse or civil partner) may also benefit from the Trust.  For example, where the settlor knows he or she will be incapacitated (e.g. by illness) they can set aside assets in a Trust for his or her own future income or for income for his spouse, civil partner, or child.


Are you already involved with a trust?

If you have ever created a trust or you are the trustee of a trust, there are several important
considerations to be aware of.

If you are a settlor

Once you have created a trust, the trustees become
responsible for running the trust, making decisions
about how the assets are invested and distributing
benefits in line with the terms and conditions of
the trust. Most settlors wish to be involved in those
decisions and include themselves as a trustee.
Letter of wishes
If the trustees have some discretion over how the
trust’s assets are distributed, you should consider
drafting a letter of wishes to guide them. Although
these letters are not legally binding, they allow you to
express your wishes to the trustees in a formal manner.
It is important that both the trustees and the settlor
keep copies of the trust and any deeds that made
changes to the trust. These documents will be needed
to prove the existence of the trust and exercise the
trustees’ powers. If any documents are missing it will
be easier to sort out before the time they are required,
while there is no time pressure.
Are the trustees and beneficiaries still suitable?
The settlor often reserves certain powers during their
lifetime such as the power to change trustees, or add
and remove beneficiaries, so you should regularly
review whether the trustees and beneficiaries are
still suitable. Changes may be required if a trustee
has died, lost capacity or no longer wishes to act.
It is always preferable to have at least two trustees.

If you are a trustee

What are the terms of the trust?
The trust deed will stipulate who the beneficiaries
are, what they are entitled to and when. It will also
determine which investments are suitable and who has
the authority to make changes to the trust if necessary.
The trustees are jointly responsible for running the
trust in accordance with the terms of the trust.
Investing the money wisely
Trustees are legally obliged to invest with ‘skill and
care’ on behalf of the beneficiaries. If they don’t, they
could be sued by the beneficiaries. The investments
must align with the terms and conditions of the
trust. For example, some trusts require a balance
between the income produced and gains made by
the investments. In these situations, it would not be
suitable to hold assets that produce no income, such
as investment bonds, or no growth, such as cash.
However you invest though, you must bear in mind
that there is a degree of risk involved. The value of
investments can go down as well as up and you
may not get back the amount invested.
Regular reviews
The trustees are legally obliged to review the
investments in the trust from time to time and
must seek advice from someone who is qualified
to give it. This is why many trustees speak to
professional investment advisers or managers
about the investments in the trust


Tax reporting
Trustees must declare any income or gains
produced by the trust’s assets to HMRC and
pay any tax due from the money within the trust.
Any trust that has a liability to tax and all express
trusts (these are trusts that have been deliberately
created), must also be registered with HMRC,
unless it is exempt, within specific deadlines.
Some trusts are also liable to a small (up to 6%)
inheritance tax charge on each 10th anniversary.
Making decisions about distributing benefits
Although it is possible for trusts to run for many years,
they are usually created for a purpose and once that
purpose has been fulfilled it makes sense to end the
trust. The trustees should regularly consider how
and when they will be appointing benefits from the
trust, whether any beneficiaries need assistance and
whether it makes sense to wind up the trust, perhaps
before the next 10-year anniversary

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