Advice on The Use of Trusts

In the past Will Trusts were an essential estate planning tool, often used to mitigate Inheritance Tax where the value of an individual or a married couple’s estate was more than the Inheritance Tax threshold.

Since it became possible (in the case of married couple or a couple in a Civil Partnership) to transfer the unused nil rate band of the first to die the need for trusts to mitigate Inheritance Tax has lessened.

However, trusts are still useful tools to consider in a variety of circumstances. So, what are trusts, and when might a trust be needed?

What is a Trust?

A Trust is created when you ask someone you trust (the Trustee) to hold assets for the benefit of someone else (the Beneficiaries), perhaps your children. The Trustee will hold, invest and manage the assets for the benefit of the Beneficiaries in accordance the terms of the trust and subject to their duties as a Trustee.

The Trustee will also be responsible to deal with the administrative tasks such as registering the Trust with HMRC on the Trust Registration Service and to file tax returns and prepare accounts, where appropriate.

Throughout the duration of the trust, it is open to the Trustee (subject to the terms of the Trust) to use their discretion to make payments of capital and/or income out of the trust to beneficiaries who might need it for education, maintenance or their general benefit. Therefore, they can be quite flexible in when provision is made for the Beneficiaries.

When might a Trust be needed?

Will Trusts have many uses some of which might include; asset protection, tax mitigation, providing for disabled or vulnerable beneficiaries, resolving property disputes (i.e. on divorce), holding property which is jointly owned or to protect against remarriage and the long term impact of care.

Some of the more common uses of trusts that we come across include:

Life Interest Trusts

Life Interest Trusts are particularly useful to protect the share of your property against the effects of remarriage by a surviving spouse or partner and/or the long-term effects of care. These trusts are also popular where couples have children from previous relationships and are concerned to ensure that their respective children inherit their estates.

Life Interest Trusts work by giving the surviving spouse or partner the right to either live in the property or receive the income from it (if its rented out, or if it has been sold and the proceeds of sale invested) for their lifetime, with the capital passing to your chosen remainder beneficiaries when the spouse or partner dies, or ends the trust sooner.

This means that if the surviving spouse or partner was to remarry or require long term care after your death, your share of the property would not form part of their estate and therefore be available to pay for the care, or to be spent during the course of the new marriage.

Discretionary Trusts

Discretionary Trusts are particularly useful when you wish to benefit individuals, but you have some reservations about giving them large sums of money outright. For example, you might be concerned about their young age, future divorce, bankruptcy, overbearing partner, or excessive spending habits.

Discretionary Trusts are a good way of providing for future generations who may not be born yet.

The beneficiaries of a Discretionary Trust do not have a right to any of the assets, they just have a hope of receiving something from the trust, if this is what the Trustee decides, at some point. The Trustees have the ultimate decision-making powers as to when to pay out of the trust, to who and in what amount. It is possible for you to leave a non-binding letter to your Trustees, setting out what you would like them to think about when considering making a payment out.

Disabled Person’s Trusts

Disabled Person’s Trusts are a useful way of providing for a Disabled Person who may not be able to hold assets themselves and without affecting their means tested benefits.

18-25 Trusts

When making provision for children, parents may be concerned at the prospect of the children inheriting potentially quite large sums of money at the age of 18. An 18-25 trust is a useful way of deferring a child’s entitlement to the capital (as they will be entitled to any income from 18) until an age up to 25. These trusts also benefit from favourable tax treatment.

What else do i need to bear in mind?

When considering a trust, it is important that you seek specialist advice so that you fully understand how the trust works, and what the potential tax and registration requirements are.

For further information regarding the above or if you would like to discuss a Wills & Probate related query with one of the team, please call us on 0800 011 6666 or e-mail the team at