Estate planning can feel like a complex and daunting process. As experienced solicitors, we frequently encounter clients who are concerned about how to best protect their assets for their loved ones. One of the most powerful and flexible tools available for this purpose is a trust.
Trusts are often mistakenly perceived as exclusively for the rich. This couldn’t be further from the truth. While they are powerful tools for wealth management, their core function is to protect and distribute assets for loved ones, making them relevant to a wide range of individuals and families. The key benefit of a trust is its ability to offer a level of control and security that a Will can’t. A Will dictates who receives your assets after your death, but it doesn’t provide ongoing management or protection. A trust, on the other hand, allows you to set clear rules for how your assets are handled and ensures they are used exactly as you have intended.
For example, a trust can be used to safeguard an inheritance for a child or grandchild who may be too young or not yet financially responsible enough to manage a significant sum of money. In these scenarios, a trust provides a structure where a trusted individual (the trustee) manages the money on the beneficiary’s behalf, ensuring it is used for their benefit. This kind of thoughtful planning is not exclusive to large estates; it is equally important for a family with a modest home and savings.
Ultimately, different types of trusts empower individuals to secure their family’s future, no matter the size of their estate, by providing peace of mind that their legacy is protected and their wishes will be carried out with precision and care.
What exactly is a trust?
A trust is a legal arrangement that allows you to set aside assets for the benefit of others. These assets, which can include money, property, investments and more, are legally held by a person or a group of people called the trustees. The trustees are legally obligated to manage these assets according to the terms of the trust for the benefit of the individuals you have chosen to receive the assets, known as the beneficiaries.
The key players in a trust are:
- The settlor: The person who creates the trust and places their assets into it.
- The trustees: The individuals (or a professional firm) who hold legal title to the assets and manage them.
- The beneficiaries: The individuals who will ultimately benefit from the trust’s assets.
The terms of the trust are set out in a legal document and dictate how and when the beneficiaries can receive the assets. This structure offers a high degree of control and flexibility, making trusts an important component in estate planning.
The main types of trusts
There is no one-size-fits-all solution when it comes to trusts. The right approach for you depends entirely on your personal circumstances and goals. Here, we delve into some of the most common types of trusts used for estate planning in the UK.
Bare trusts
A bare trust is perhaps the simplest form of trust. In this arrangement, the beneficiaries have an absolute right to both the income and the capital of the trust assets as soon as they turn 18. Until that age, the trustees are responsible for holding and managing the assets on their behalf.
Bare trusts are useful if you wish to set aside money or assets for a child or grandchild but want to ensure the funds are ring-fenced until they reach adulthood. It provides a simple way to gift assets while maintaining control while the beneficiary is a minor. The downside is that once the beneficiary turns 18, they can demand the full amount, regardless of whether you or the trustees believe they are mature enough to handle it.
Interest in possession trusts
Interest in possession trusts are designed for different people at different times. They create a distinction between an income beneficiary and a capital beneficiary.
The income beneficiary is entitled to the income generated by the trust assets (for example, dividends from shares in a company) for a specified period or for the remainder of their life. Once this period ends, the capital of the trust passes to the capital beneficiary.
This type of trust is popular with blended families. For example, if you have remarried but have children from a previous relationship, you might use an interest in possession trust to ensure your current spouse is provided for during their lifetime through the income from your assets.
After your spouse passes away, the capital is then preserved and passed on to your children. This structure allows you to care for your spouse without disinheriting your children.
Discretionary trusts
These trusts give significant power to the trustees. The settlor names a group of potential beneficiaries, but the trustees have the discretion to decide which of these beneficiaries will receive assets from the trust, when they will receive them and how much they will receive.
This can be a good option in situations where a beneficiary may not be capable of managing their own affairs, perhaps due to age, a health condition or an addiction. It allows you to set aside assets for their benefit while giving the trustees the authority to release funds only when it is appropriate and in the beneficiary’s best interests.
To guide the trustees, you can create a Letter of Wishes, which, while not legally binding, provides them with clear guidance on how you would like the assets to be distributed.
Trusts for a vulnerable person
This is a specific type of discretionary trust designed to hold assets for an individual with a physical or mental health condition. This type of trust offers specific tax advantages. It ensures that the individual’s assets are managed appropriately, and that they receive the support they need without their inheritance negatively impacting any means-tested benefits they may be receiving.
This trust ensures the long-term care and financial stability of a vulnerable loved one. It provides peace of mind that their inheritance will be handled by a trusted person or group of people, and used in their best interests, while navigating the benefits system.
Lifetime/property protection trusts
These trusts are designed to protect your property and other assets during your lifetime and after you’re gone. A common use is for couples who own their home as ‘tenants in common’. They can place their share of the property into a trust during their lifetime.
The trustees (often the children) then have control over it. The trust ensures that after both partners have passed away, the property is inherited by their chosen beneficiaries.
This type of trust can be particularly useful for protecting your home from being sold to pay for long-term care fees. It ensures that your share of the property is preserved for your children, regardless of what happens to the surviving spouse. It offers a way to maintain control over your legacy even after you are gone.
Mixed trusts
It’s possible to combine elements from different types of trusts to create a mixed trust that perfectly suits your unique requirements. For example, you might create a trust that is an interest in possession trust for a specified period, after which it becomes a discretionary trust. This flexibility can address a wide range of family and financial situations.
Why should you consider setting up a trust?
The benefits of using a trust extend far beyond simple asset distribution. They can:
- Safeguard your wealth from future claims, such as those from creditors or from a beneficiary’s divorce.
- Ensure that assets are managed appropriately for those who cannot manage their own finances.
- Give you a high degree of control over how your assets are used, even after your death.
- Be used as part of a wider tax planning strategy to mitigate inheritance tax.
- Can avoid probate, as assets held in a trust do not form part of your estate for probate purposes, which can speed up the process of transferring wealth to beneficiaries.
In conclusion
Trusts are a sophisticated and powerful tool for estate planning; however, they are also governed by complex legal frameworks. Choosing the right trust, drafting the legal documents, and ensuring everything is set up correctly requires expert knowledge. At Cooklaw Solicitors, we have a deep understanding of trusts and their application to modern estate planning. We work closely with our clients to provide bespoke, personalised solutions that align with their unique circumstances and goals.
We can guide you through every step of the process, from an initial consultation to the meticulous drafting and execution of all necessary legal documents. Our services include:
- Helping you identify the most suitable trust or combination of trusts for your needs and family dynamics.
- Handling all the legal formalities involved in creating a trust, ensuring it is legally sound and fully compliant with all regulations.
- Providing ongoing support and advice on the proper administration of a trust, ensuring all duties are met and the beneficiaries are looked after in accordance with the trust’s terms.
- Reviewing existing trusts and making any necessary amendments to ensure they continue to reflect your wishes and remain effective.
Our goal is to provide you with the clarity and confidence you need to make informed decisions about your estate. We are committed to offering a seamless, professional service that gives you peace of mind, knowing that your legacy is secure. Contact us for advice on types of trusts today.
