What Is A Trust? And What Are The Benefits Of Setting One Up?

If you’ve watched Succession or read books around wealthy families, you’ve probably heard the term ‘trust’.

Although a trust can sound like something only high-earners use, they are actually used by families all over the UK to help with vulnerable relatives, inheritance and supporting future generations.

So, if you’re interested in knowing whether a trust is right for you, we’ll explain everything you need to know – including the pros, cons, and how to set one up for yourself.

But first…

What Is A Trust?

A trust, to put it simply, is a legal way for one person to hold assets like money or property for another.

Within a trust, there are 3 main roles:

Settlors: The people who set up the trust and put the assets into it.

Trustees: The people who own and manage the trust in line with the rules set out by the settlor.

Beneficiaries: The people who are benefitting from the trust.

The key thing to note here is that whilst the trustees legally own the assets, they don’t actually benefit from them personally. They just manage them on behalf of the beneficiaries. This distinction between ownership and benefit is why trusts have become a great (and widely used) financial tool.

For example, imagine you want to give money to your child, but they are only 5 years old. The trustee will manage the money until they are old enough to take it on themselves. As part of this, you can also set rules for the trust like spending limits, what the money can be spent on and how regularly it is paid out.

What Are The Different Types Of Trust?

If you think that there is just one type of trust to choose from, think again! There are actually a few options to consider.

These include:

Bare Trusts

This is one of the most common type of trust because it is usually used for children that are under 18. Once the beneficiary turns a certain age, the trustee hands over management and full control to them.

Interest in Possession Trusts

This type of trust gives a named beneficiary (called the “life tenant”) the right to receive the income or benefit from an asset for their whole life.

So, say you wanted to leave a portfolio of properties in a trust, an interest in possession trust would allow the life tenant to get the rental income of this portfolio for life.

In this structure, the main asset (or money) is not owned by anyone outright. When the life tenant dies, the assets normally pass on to other beneficiaries like children or grandchildren.

Discretionary Trusts

Discretionary trusts give trustees a little more power, as they have the flexibility to decide how and when beneficiaries get assets.

This type of trust might be used if the settlor wants to keep things flexible or if the beneficiary is seen as unable to manage the money properly.

Mixed Trusts

Mixed trusts can be a mix of any of the above structures, designed to suit a specific family or situation.

Specialist Trusts

There are a number of other trusts that can be set up, like:

• Charitable trusts
• Trusts for vulnerable beneficiaries
• Compensation trusts

Why Do People Set Up Trusts?

It’s a good question. In truth, there are a number of reasons why it might make sense to set up a trust, including:

Inheritance tax: A lot of people use trusts to lower the value of their estate. This means that when it comes to paying inheritance taxes, their family may be able to benefit from a smaller bill.

Protecting vulnerable family members: If someone is unable to manage their money due to their age, a disability or any other reason, a trust helps to protect them and the money.

Allocating capital: Trusts allow settlors to allocate capital the way they see fit. For example, a spouse might receive income throughout their lives, with the main assets eventually being passed on to children.

Wealth planning long term: Trusts can last up to 125 years, so it can benefit families across generations.

How Much Does It Cost to Set Up A Trust?

With all the structures and legal input, setting up a trust sounds expensive.

However, it normally costs between £1,000 – £2,000 but the exact amount depends on how much legal advice you need and how complex the trust is.

The only other cost worth considering is a fee for trustees, which is paid in exchange for them managing it.

Do You Pay Tax On Trust Income?

Yes you do! In fact, trusts have their own tax laws. The types of taxes that apply include:

Income tax: Trusts pay income tax on any interest or dividends, usually at a higher rate than normal income tax.

Beneficiary tax: Beneficiaries also have to pay income tax on the amount they receive – but they can claim some of it back in certain situations.

Capital gains: If any assets are sold, capital gains taxes apply.

Inheritance tax: Inheritance tax is charged every 10 years (up to 6%) and when assets leave the trust, which is called an exit charge.

What Are The Negatives Of Trusts?

Whilst trusts can be a great financial tool, they also have their drawbacks.

For example, they cost money to set up and manage, especially if they are complicated structures.

The settlor also hands over total control to the trustees, and is unable to access the assets or money once they are handed over. In this way, it can be quite restrictive.

They can also open up family feuds, especially in discretionary trusts where the trustee can make decisions that they feel are best. In these situations, trusts can become a bone of contention, rather than a helpful tool.

Understanding Trusts

A trust isn’t just a tool for wealthy people. They can be a great way to keep assets safe, plan for the future and make sure family members are looked after.

However, as with all financial tools, if you are considering setting up a trust it’s probably best to get some professional advice. After all, if you plan on protecting your assets for generations, you want to make sure they are looked after properly!