What Are Trusts?
Trusts can be established during a person’s lifetime or by their will and there are a number of different types of trust. The person establishing the trust is referred to as ‘the settlor’, or ‘the testator’ if the trust is established by their will.
Trust funds are held by the trustees (who are appointed by the settlor or testator) and a common theme for all trusts is that the trustees must at all times act in the best interests of ‘the beneficiaries’, that is, the people who the trust was set up to benefit.
A will can establish a ‘life interest’ trust. This can be used in any situation where income is to be paid to one beneficiary during their lifetime and for another beneficiary thereafter. For example, it can be used where a person remarries and wishes to provide income from the whole or part of their estate for the current spouse during their lifetime and for the capital to then pass to children thereafter.
Alternatively a ‘will trust’ can be discretionary allowing trustees absolute discretion as to which beneficiaries should benefit and in what proportions, or contingent upon a beneficiary attaining a certain age. If the testator had charitable objectives in mind they could also provide for a charitable trust within their will.
A trust can also be established during a settlor’s lifetime to mitigate Inheritance Tax and can be used where the settlor wishes to retain control over how funds are applied, especially where some beneficiaries may be vulnerable. This is often the case where large gifts are contemplated to beneficiaries who are young, financially unstable or suffer from a form of addiction.
‘Personal Injury Trusts’ are a special type of trust established by people who receive personal injury compensation, often where they are in receipt of means tested benefits. These are particularly important to ensure that entitlement to such benefits is preserved but they can have other advantages.
Trustees are guided by a letter of wishes written by the settlor during their lifetime and regularly reviewed. Such letter is not legally binding but provides the trustees with the necessary guidance to administer the trust funds after the settlor’s death in line with the settlor’s objectives.
The advantages of establishing a trust can be significant. However, when doing so it is important to obtain legal advice from an expert because the legal and taxation consequences can often be complex.General, George Ide, Investment, News, Private Client, Wills and Probate