What is a trust?
A trust is created when a person (a ‘settlor’) transfers assets to people whom they ‘trust’ (‘trustees’) to hold them on behalf of others (‘beneficiaries’).
Why use a trust?
- Convenience – the beneficiary may be a minor who is unable, as yet, to take responsibility for the property themselves, or the settlor may be looking for flexibility to provide for a class of beneficiaries who might not even be born at the time the trust is created (such as grandchildren).
- Reduce taxation – property placed within a ‘Discretionary’ trust does not normally form part of the settlor’s estate on death (unless the trust is one where the settlor retains an interest) and as such this reduces any inheritance tax that may be due.
- Protect the property — this is the main reason that trusts are created – in case:
o the beneficiary turns out to be someone who cannot manage the property themselves, oro the property would otherwise need to be sold to pay for long-term care, oro to protect the property from potential bankruptcy or divorce.
Different types of trust
1. Qualifying ‘Interest in Possession’ (QIIP) trusts; and
2. ‘Discretionary’ trusts (also known as ‘Relevant Property Trusts’) such as:
- ‘Nil rate band’ trusts.
- ‘Charge’ trusts.
Under a QIIP trust, a beneficiary is entitled to the income generated by the underlying property held within the trust whereas with a ‘Discretionary’ trust no one person is absolutely entitled to the income, rather it is at the discretion of the trustees as to the distribution dependent upon the terms of the Trust Deed.
Trust planning is for the long term and can be used to secure assets, including property, which are likely to grow in value.
The Basics of Trusts
NOTE: Trust planning is specialist work and should only be undertaken by someone who is qualified to give such advice.
This tip was first printed in Tax Insider in December 2016.