16 June 2021

I know, I know – who wants to read about trusts!? It’s either too boring or too complicated to get into and nobody really has enough time in the day to delve any further. But, please humour me – trusts are actually quite interesting and could be extremely useful for you and your loved ones.

Generally speaking, trusts are regarded with much suspicion amongst the general public. This is likely caused by the regular negative press that trusts have received over recent years. The perception is that trusts are a tool for tax-evaders or those with significant wealth. This misconception is not assisted by the fact that many people do not understand what trusts can be legitimately used for, how they work or why they should exist at all. But I am here to break it all down for you…

Firstly, consider that all of your assets and liabilities are contained within a suitcase; a compartment for all the assets (your house, your bank account, your bicycle) and a separate one for your liabilities (your mortgage, your credit card bill and the leccy bill). Every person must have one suitcase. Even babies will have a suitcase, although perhaps with very little inside. You will carry your suitcase with you for your entire life, you own all of the items within and you can do more or less anything you want with those items. This suitcase is often referred to as a person’s estate, or legally known as a ‘patrimony’.

In very basic terms, a ‘trust’ is simply a creation of a second suitcase. It is the transfer of items from your own suitcase to this second suitcase. The second suitcase can either be created during your lifetime, or included in your Will for it to take effect on your death, depending on your objectives You, as the creator (legally known as the ‘Settlor’) of the second suitcase can decide:

a. who carries the suitcase and makes decisions relating to the items within (the ‘Trustee’); and

b. who can benefit or enjoy the use of the items held within (the ‘Beneficiary’).

From this central arrangement, we can then build our understanding of how trusts operate.

• What powers or responsibilities does the Trustee have?
• What benefits can the beneficiary receive, and for how long?
• Does the settlor have any role in the relationship once the trust is created?
• What is the trust’s purpose and how should this be achieved?
• When does the trust come into force?
• What are the tax implications of putting assets into the trust?

Many of these types of questions will depend on the type of trust which you put in place. Your solicitor will be able to advise of the most suitable type of trust, depending on the size and nature of your estate. The type of trust will also be determined by your objectives. Some of the most common objectives are:

• For the protection of children – From the age of 16, a child can interact and transact with their assets in any way they choose. This may be undesirable, if a child was to inherit from a deceased parent, for example. Therefore, a trust can be set up to hold funds on the child’s behalf until they are of a mature age to deal with the assets personally.

• For the protection of persons with an incapacity – If you wish to provide for a vulnerable or disabled person, you may be concerned about how these funds should be handled. It is important to ensure that any proposed benefit does not affect the person’s ongoing entitlement to means-tested benefits or avoid exposure to care costs. A trust can act as a vehicle in these circumstances to manage and administer money on their behalf.

• Second marriage situations – Where you have entered a second marriage and have children from a previous relationship, you may be concerned about leaving all of your assets to your new spouse (at the risk of your estate not passing to your children, in due course). A trust can be set up to allow the spouse to enjoy your estate in their lifetime, but pass to your children or other beneficiaries, on their death, for example.

• Beneficiaries with destructive habits – You may also be concerned leaving your estate to someone who has substance-dependency issues or a gambling problem, for example. A trust would allow funds to be held on their behalf and can guide how the funds should be used.

• Risks of claims from creditors or following a divorce – If you were to gift or transfer assets to a beneficiary who later becomes insolvent or divorced, the assets may be used as part of the settlement. A trust would protect the assets in these situations.

• Reduction of tax liability – Trusts can also be used to avoid unnecessary tax liabilities, either in lifetime or upon death.

• Asset protection – Trusts can be used to ring-fence and protect certain assets from creditors. In some circumstances, they can be used as part of an overall strategy in terms of care cost planning for the future.

Overall, trusts are an invaluable tool for successful lifetime succession planning, which can be used in a variety of circumstances, and are not solely restricted to the elite and wealthy. If you would like more information about Trusts, please download our ‘Trusts: In Detail” guidance sheet here.

Otherwise, if you would like to discuss whether a trust would be suitable for your affairs, please do not hesitate to get in touch with the BTO Personal Team.

For more information, please contact a member of our Wills, Estates & Succession Planning team.