A trust is a legal mechanism, which can be created during your lifetime or by your Will on death, where you place assets under the control of the trustees for the benefit of a beneficiary or class of beneficiaries.
It enables you to give away assets but keep some control. Trusts offer flexibility and wealth protection and, crucially, offer protection against the possible insolvency or divorce of the intended beneficiaries.
Trusts are widely used and come in many forms; the two most common are Interest in Possession trusts and Discretionary trusts.
In an Interest in Possession trust, the beneficiary is entitled to receive the income from the trust fund or enjoy the use of the trust assets. If you set one up for your children, they won’t be able to cash in the assets in the trust but will receive the income from it for their lifetime. The assets can be protected and passed onto your grandchildren, either on your child’s death or if they decide to give up their right to the income. Tax issues relating to your children’s estates would need to be considered, as the asset will form part of their estate for inheritance tax purposes.
In a Discretionary trust, the trustees have a pool of potential beneficiaries and have absolute discretion to decide which of the beneficiaries may benefit from the trust fund, in what way and when. For example, the assets and income could be slowly released to your children when necessary or held back completely. If a child’s relationship breaks down, the assets and income can be diverted to your grandchildren or any other beneficiary in your trust pool.
The tax treatment of trusts is complex and you should take advice before embarking on a trust route; however, that should not be a reason to avoid them, as the flexibility and protection they offer you can often outweigh the tax implications.
The law and tax regulations change frequently, so if you already have a Will or trust we advise you to review them at least every five years