A brief guide
From simple trusts for grandchildren to complex tax planning trusts, there are a wide variety of different types of trust. However, trusts are not always a suitable option and with HMRC’s new regime for the registration of trusts, the administration involved in running a trust can outweigh the benefits. This article will give a brief overview of the most common types of trust and the circumstances in which they might be helpful.
1. Bare trusts
A bare trust is a simple arrangement where the person who has legal ownership of property (the trustee), holds that property absolutely for another person (the beneficiary).
For example, a grandparent might be the named holder of a bank account, but they hold the funds in the account on bare trust for a grandchild. Bare trusts often arise where a child inherits money or property, but because they are not an adult the property must be held by a trustee for them until they reach the age of 18.
2. Discretionary Trusts
Discretionary trusts give the trustees power to decide how and when beneficiaries should benefit from the assets held in the trust. The person creating the trust (known as the settlor) often defines a group of potential beneficiaries (e.g. all the settlor’s children), but the trustees decide how the trust fund should be used to benefit persons within that group.
Discretionary trusts can be useful in situations where potential beneficiaries are vulnerable (e.g. if they are addicts) or their circumstances mean it would not be desirable to pass assets to them outright (e.g. if they are divorcing or might be made bankrupt). They can also be useful where the settlor wants decisions to be made based on facts which might not be known at the time the trust is set up. For example, in some cases it is difficult to predict whether certain inheritance tax reliefs will apply at the time of death (e.g. business property relief and agricultural relief). Using a discretionary trust in a Will allows the trustees to work out if those reliefs apply, before assessing the most tax efficient way to distribute the assets between the potential beneficiaries.
3. Life Interest Trusts
A life interest trust gives a beneficiary (known as the life tenant) a right to receive a defined benefit from the trust fund for a certain period (usually for their lifetime). The benefit is often the right to live in a home rent free, or the right to receive interest from cash or dividends from shareholdings. When the life tenant dies, the capital value of the trust fund passes to other beneficiaries.
Life interest trusts set up in Wills can be helpful for couples, to protect the assets of the first to die from any change of circumstances for the survivor of them (e.g. if the survivor needs long term care or becomes bankrupt or remarries). A life interest trust is also often used in second marriages, where on the death of the first spouse they want the surviving spouse to be able to continue living rent free in the matrimonial home. Then when the surviving spouse dies, the share of the property belonging to the first spouse to die can pass back to their own children (rather than to the beneficiaries of the second spouse’s Will, who might be their own children from an earlier marriage).
4. Homes in trust
A common question we are asked is whether using a lifetime trust can avoid care home fees. Never transfer valuable assets into trust without taking specialist advice first. If you transfer assets into a trust during your lifetime with the intention of trying to mitigate care home fees, the transfer can be a “deliberate deprivation”. This means the Local Authority could assess your liability to pay care home fees as if you still own the property. If you have transferred your home into trust but are unsure whether that arrangement is right for you, please contact us for advice.
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