What Is A Trust? Which Is The Right Trust?

 

In his latest blog, Matt Kelly discusses ‘What is a Trust? And which is the right Trust?’….

What Is A Trust And When Should They Be Considered?

Trusts are legal entities that, in effect, hold assets for your nominated beneficiaries. If you want to protect assets as a means of passing wealth down to younger generations, children from previous relationships, or to protect assets for vulnerable beneficiaries, then one of the trusts explained below might suit you.

With all trusts you must appoint trustees who are responsible for holding the assets and managing those assets for the benefit of the beneficiaries. Sometimes the trustees can also be the beneficiaries.

More than One Type Of Trust….

There are many types of Trusts and initially a distinction should be drawn between trusts where assets are transferred out a person’s ownership and into the trust during their lifetime (a “settlement”) and trusts included in a will that come into effect on death (“will trusts”).

In this blog I will focus on the two very common types of will trusts.

Discretionary Trusts

Discretionary trusts established under a will receive assets from the estate of the deceased whether a fixed sum, e.g. £100,000.00, a share of the estate or even the entire (net) estate. A broad class of beneficiaries is defined (often the surviving spouse and the descendants of the deceased) and the trustees have the discretion as to which of the beneficiaries amongst the class should receive income or capital from the trust though trustees are often guided by a non-binding letter of wishes prepared by the deceased which is stored with the will.

The key point is that no one beneficiary has a right to inherit anything, not even the surviving spouse, and the trustees can adopt a flexible approach during the trust period (which could be many years) regarding the differing needs of each beneficiary.

Life Interest Trusts

Life interest trusts established under a will ( formally known as immediate post death interests or IPDIs) involve the deceased leaving a particular asset to be enjoyed by one beneficiary during their lifetime (the life tenant) with the asset itself passing to other beneficiaries (remaindermen beneficiaries) upon the death of the life tenant.

Frequently the asset being left is a property or share of a property with the surviving spouse being the life tenant enjoying a right of occupation of the property or a right to income from the proceeds of sale if the property is sold. Upon the death of the life tenant the capital in the trust passes to the remainder beneficiaries; usually the children of the first to die.

It is also possible to leave cash assets on a life interest trust providing income for the life tenant during their lifetime.

Life interest trusts provide certainty that specified assets will definitely pass to nominated beneficiaries.

Life Interest Trusts & The Power To Appoint Capital – A Third Way?

Sometimes clients don’t require the flexibility, and associated uncertainty, of a discretionary trust and prefer the peace of mind offered by a life interest trust though worry the life tenant, usually the surviving spouse, might be prejudiced through not owning assets absolutely and only benefitting from a right of occupation or a right to income. It is possible to include a power of appointment that would allow the trustees, if all trustees agree, to appoint capital (either absolutely or by way of a loan) to the life tenant if the trustees deem access to capital appropriate.

There are other ways in which additional flexibility can be built into a life interest trust to balance protecting capital for remaindermen beneficiaries and ensuring adequate provision for the life tenant.

Get Some Advice…

To ensure you choose the correct trust for your specific circumstances you must seek professional advice from a suitably qualified practitioner. Understanding how a particular trust will work, the differing tax regimes that different trusts fall under and the expenses of running the trust are all key to choosing the right trust for you.

For further information or advice feel free to give me a call on 01283 or email me at m.kelly@timms-law.com.

 

Matt Kelly
May 2021