A Guide to Trusts

 

We will give you an understanding of what trusts are, how they work and examples of who they are best suited for.
 
It would be impossible to go through all the technical workings and variations with all the types of trusts that can be written into Wills or set up outside of Wills.
 
The key is to remember that most of the time we can tailor a trust to meet our client's wishes. The 3 key areas that need to be established are:
 
1. What is going into the trust (Assets i.e. Property/Savings)
2. Who is to benefit from the trust (Beneficiaries)
3. Who is going to manage the trust (Trustees)
 
Note: Death in Service Benefits should be already nominated to beneficiaries through your workplace, therefore, will pass outside the estate and not go into any trusts. The same applies to pensions. If you haven’t done this then you need to speak to your employer/pension provider.
 
Two types of Trusts
Inter Vivos – In life
Testamentary – After death
 
Why do we need these Trusts?
With a standard Will, all it does is point in one direction even though there are many levels within a Will.
 
For example:-
A couple with children will often say in their Will for the estate to pass to each other and then to children.
 
They believe this means that their estate will pass to their partner and then automatically pass to the children when they die. This is not the case when the estate passes to the partner, the Will is finished. The assets are now solely owned by that one person, if they change their Will, meet someone else, have more children, go bankrupt etc. then the estate could be lost and the children get nothing.
 
The second level clause in the Will pointing to children is just for a situation of both dying at the same time, but that is extremely unlikely. Most of the time people die independently and this is where the problems with a basic Will start.
 
This is where trusts come into play. If you want to put guarantees in place and ensure your money isn’t wasted then having a simple trust written into the Will is the easiest way to accomplish it.
 
A trust can simply take legal ownership of assets away from someone without taking away the benefits of owning those assets. Think of it like a company car, you can have full use of that car, but when you have finished with it, the company takes it back. No one else can gain access to that car, if you get divorced, go bankrupt etc. the car goes back to the company.
 
Once assets are put into a Trust they belong to the Trust, not the beneficiary. The beneficiary can get gifts or even payments from the Trust but will never own the assets themselves. Trusts simply hold and invest assets on a beneficiary’s behalf. A Trust, which can be written as a standalone document that is set up whilst still alive and comes into force immediately or if written into your Will, is effected upon your death.
 
So with a trust, say for instance a property goes into that trust, you have full use, you can even change it for another house, but when you die then that house is owned by the trust and can then be given out to the children. No one else can get their hands on it other than who you have named as beneficiaries.
 
Trusts are commonly used to:
 
• Ensure that your children are not disinherited through remarriage after your death, and ensure that they are protected from subsequent divorce settlements too.
 
• Protect funds from the Local Authority should a surviving partner become infirm and require long-term care.
 
• Help your children benefit from funds without running the risk of the fund creating an additional Inheritance Tax burden.
 
• Protect money for a minor until they reach a specified age, perhaps allowing income in the meanwhile.
 
• Protect a beneficiary's inheritance for a short period until a bankruptcy has been discharged.
 
• Make provision for a disabled child who is unlikely to be able to manage their own financial affairs.
 
Who controls the Trust?
The trustees chosen by the testator will control the trust usually under the guidance of a letter of wishes. They have a responsible role and have to act in the best interest of the beneficiaries. People often worry about putting Trusts in place because they think they will lose control, but actually, they are gaining more control because their control will reach beyond the grave as the Trust will run on after their death and still follow their letter of wishes. You need at least 2 trustees wherever property is involved unless you name a professional trustee.
 
How They Work
Specific assets (Money, property etc.) are left by the settler to Trustees ‘on Trust’ to hold on the terms of the Trust Deed. The money or property is left so that beneficiaries can have the income from the money or use of the property for a specified number of years or the rest of their life. You can determine specified payments to be made to the beneficiary or allow the Trustees discretion to determine how much and when.
Each trust can be tailored to fit the client's needs
 
• The Settler = the person who establishes the Trust.
• The Trustees = the person or persons charged with holding the trust property on behalf of the beneficiaries.
• The Trust Deed = the written document, which sets out the terms of the Trust, set up by the Settler.
 
The important part is the benefits of the Trust rather than the workings, just like most people don’t need to have the understandings of an engineer to drive a car, they just need to know it will do the job for them.
 
Jointly Owned Assets
Any assets that are owned jointly will not be passed under the Will and not go into the trust (unless the other joint owner dies too). So if a couple owns a property jointly then when one of them dies, the property goes straight to the joint owner even if the Will says to someone else. The same with any other assets like bank accounts. So if you want your share of the property to go somewhere else then we need to change the ownership of the property to tenants in common. This is standard practice when we draft the Trusts into the Wills.
 
Contested Wills
A lot of couples with children will believe that they don’t need a trust because the surviving partner will make sure their children inherit. They think that it is just a case of making sure their Will gives the estate to the children, however, this is where they are wrong. You see a Will can be contested and changed after your death. It’s hard to believe that someone else could change your wishes once you have gone, but it’s true. However, a trust cannot be contested and will protect your assets.
 
So whilst the law of England and Wales permits you to write the Will of your choice if you fail to make provision for someone from the following list, then that person, or their representative, may bring a claim for Reasonable Financial Provision under the Inheritance (Provision for Family and Dependants) Act 1975.
 
The list of dependants are:
 
• spouses
• ex-spouses
• recently separated partners
• civil partners
• ex-civil partners
• cohabitees
• children
• other dependants
 
Some believe that prenups will protect them, however they are not legally recognised in this country and even if they were it would only protect against divorce, certainly does not have any legal standing on death.
 
Different types of Trusts
 
• Children’s Flexible Trust
• Wealth Management Trust
• Legacy Trust
• Disabled/Vulnerable Person’s Trust
• Right to Occupy Trust
 
Examples of real-life situations where the use of Trusts was implemented:
 
Example 1
The client had children and wanted to ensure that their children weren’t given the inheritance at age 18 as clearly it could be detrimental to them and the inheritance could be wasted. Their main concern was what their children would do with £500,000 each on their 18th Birthday. So instead a children’s flexible Trust was written into the Will to extend that age to 25. The trustees would ensure those children have the money they need for education, medical, car, home, holidays etc. out of the Trust fund but with the safeguard of not being squandered.

 

Example 2
Clients with children wanted to make sure if either of them met someone else after the other had died, that their share will go to the children and not to the new partner. The implementation of a Wealth Management Trust ring-fenced their share to ensure it goes to the children after the surviving partner has passed.

 

Example 3
Clients with children and grandchildren wanted to make sure that the assets they have worked hard for to build up stay within their family and wouldn’t be eaten up in taxes and go to exes of children. The use of a Legacy Trust was ideal in this case, as it was for bloodline planning and stopped inheritance diminishing through being taxed again and again. It will benefit the children, grandchildren and great-grandchildren. Essential for anyone with an estate liable to Inheritance Taxes.
 
Example 4
The client had a disabled child who would not be capable of dealing with finances. The utilisation of a disabled person’s trust protected the funds and the responsible trustees will be able to buy the things they need without affecting any state care & benefits. When the child dies the trust funds can be distributed to other beneficiaries.
 
Example 5
Clients with 2 children wanted to leave their estate to them in equal shares. However one of the children was still living with the parents whereas the other had their own house. The clients didn’t want the house immediately sold on death as this will leave the child homeless. Using a Right to Occupy Trust safeguarded this and the clients set how long the child can remain in the property before it is sold and the funds split.
 

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