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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.

some reqirded – needs a good readthrough

Leaf Financial Advisers Ltd. - Trusted Financial Advisors

How do Trusts work?

Trusts have been around for a very long time.  They are legal arrangements in which a person, known as the “trustee,” holds and manages assets on behalf of another person or group of people, known as the “beneficiaries.” Trusts are established based on a trust agreement or a will and can serve various purposes, including asset protection, estate planning, charitable giving, and more.  The person who establishes the trust is known as the settlor or grantor. The settlor transfers assets, such as money, property, investments, or other valuable possessions, into the trust.

Trusts can be complex legal structures, and it’s important to seek advice from qualified professionals such as solicitors or financial advisors when considering the creation of a trust.

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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. Anyone can act as a trustee; as long as they are over the age of 18 and have full mental capacity.  The settlor will often also act as a trustee so that they can keep an element of control over the assets in the trust. 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 rights 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 in different ways to income tax, capital gains tax and inheritance tax. 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 and it is may be worth 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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