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Trusts have a reputation for being complicated and that reputation is not entirely fair. While trusts certainly feature in sophisticated tax planning and the management of substantial fortunes, they also serve much simpler purposes that apply to people of ordinary means, such as providing for a child who is too young to manage money, protecting assets for a family member with a disability, or ensuring that property passes to your children rather than a future spouse’s new partner. These are everyday concerns, and trusts can address them in ways that a simple will cannot.
At its core, a trust is an arrangement where one person – the trustee – holds and manages assets for the benefit of another, which is the beneficiary. The person who creates the trust and transfers assets into it is called the settlor. These three roles can overlap in various ways depending on the type of trust and its purpose.
The Trust Deed: Getting the Rules Right
The trust deed sets out the rules: who benefits, when and how they benefit, what powers the trustees have, and what happens in various contingencies. Getting these rules right is crucial, because once assets are in a trust, the terms of the trust determine what can and cannot be done with them.
Lifetime trusts, created while you are still alive, serve different purposes from will trusts, which come into effect on death. A lifetime trust might be used to set aside funds for grandchildren’s education, provide for a disabled relative while preserving their entitlement to means-tested benefits, or to move assets out of your estate for inheritance tax purposes (though the tax rules here are intricate and the benefits depend heavily on timing and circumstances).
Will trusts, by contrast, are often used to give a surviving spouse the right to live in the family home or receive income from investments while ultimately preserving capital for children from a previous marriage. The classic scenario is if you want to provide for your current spouse but also ensure that your children from your first marriage eventually inherit. A simple gift to your spouse achieves the first aim but not necessarily the second in that your spouse could remarry and leave everything to someone else. A trust can protect against that.
Discretionary Trusts
Discretionary trusts give trustees wide powers to decide which beneficiaries receive what and when. They are flexible and useful when circumstances may change or when you want trustees to respond to beneficiaries’ needs as they evolve over time. But that flexibility comes with responsibility.
Trustees must exercise their discretion properly, in the interests of the beneficiaries, and in accordance with the terms of the trust. Being a trustee is not a ceremonial role. It carries real legal duties and potential personal liability if things go wrong.
Interest in possession trusts, by contrast, give a named beneficiary a right to income or use of trust property. The life tenant (as they are often called) has a fixed entitlement, not dependent on trustee discretion. When the life tenant dies or their interest ends, the capital passes to the remaindermen – the people entitled to the trust assets once the prior interest has finished. This structure is common in wills where someone wants to provide for a spouse for life but ensure children ultimately inherit.
Tax is never far from discussions about trusts. Different types of trust are taxed differently for income tax, capital gains tax and inheritance tax purposes. The rules are technical and have changed significantly over the years, which means trusts created decades ago may now operate in a tax environment quite different from what was anticipated when they were set up. We regularly review existing trusts for clients, advising on whether they still achieve their intended purpose and whether any restructuring might be beneficial. We also advise on the ongoing tax compliance obligations that trustees must meet, which is returns to file, records to keep, deadlines to observe.
Choosing the Right Trustees
Choosing the right trustees matters enormously. Professional trustees, such as solicitors, accountants, trust corporations, bring expertise and continuity but charge fees. Family trustees may serve without charge but might lack experience, fall out with each other, or find the administrative burden overwhelming.
Many trusts use a combination, which is a professional trustee alongside family members, bringing both expertise and personal knowledge of the beneficiaries. We often act as professional trustees ourselves, and we advise lay trustees on their duties and help them with the practical work of trust administration.
How We Can Help
At Tower Bridge Legal, we help clients establish trusts tailored to their particular circumstances and objectives. We draft trust deeds with care, because ambiguity in a trust document causes problems for years to come.
We advise on the tax implications of different structures. We act as trustees where clients want professional involvement, and we assist existing trustees, whether professional or lay, with administration, compliance and the exercise of their powers. If you are considering whether a trust might be right for your situation, or if you are a trustee looking for guidance on your responsibilities, we would be glad to help.
