In this first part of our series on trusts, specialist trust law solicitor Ed Granger answers the fundamental question: what is a trust?
Trusts made simple
In simple terms, a trust exists whenever the legal owner(s) of property (the trustees) hold that property, at least partly, for someone else’s benefit (the beneficiary).
A very straightforward example might be a parent opening a bank account for the benefit of her child. The parent is the trustee, who has control over the account; but the money in the bank account is not hers to do with as she wants. Instead, she is running the account for the benefit of her child (the beneficiary).
What all trusts have in common is that separation of roles, between the trustee who has control over and responsibility for the assets in question, and the beneficiaries who benefit from them.
What kinds of trust are there?
Broadly speaking, when we’re thinking about the kinds of trust private individuals might set up, trusts can be divided into four categories:
- Bare trusts
- Fixed interest trusts
- Discretionary trusts
- Hybrid trusts
Bare trusts
Just as in the example above, a bare trust is where one or more beneficiaries are the true owners of the property, and the trustee(s) simply manage the property on their behalf.
Fixed interest trusts
Example: I give my house to my husband for the rest of his life, then on his death to my children equally.
With a fixed interest trust, one or more beneficiaries have the right to use an asset – and often to receive the income from it, but they are not given the right to spend the capital money tied up in that asset. Only when the income beneficiaries are no longer entitled to that income (typically on death) will it pass to the final beneficiaries (“remaindermen”).
We often see this arrangement with second marriages, for instance, where the spouses want to provide for one another but ultimately to protect their estates for their own children.
Discretionary trusts
Example: my trustees are to use this gift for the benefit of my children as they think fit.
With a discretionary trust, the person creating the trust doesn’t decide at the outset how much each person is to receive, and when. (They may well have an idea what they want to happen – often recorded in a separate “letter of wishes” – but it isn’t set in stone.) Instead, the trustees are given a list of people that could benefit from the trust fund, and broad authority to decide when and how that should happen.
Because no one is entitled to the trust fund unless and until the trustees decide to pay money over to them, this kind of trust is not treated as belonging to anyone. It is treated instead as an entity in its own right – for example, when it comes to taxes. For the same reason, this kind of trust doesn’t generally affect a beneficiary’s entitlement to state benefits.
Hybrid trusts
Some trusts don’t fit neatly into the categories listed above. One example is the “flexible life interest trust” – which works like the fixed interest trust described above, but where the trustees have a power to pay some of the capital money tied up in the trust to a beneficiary if they consider it appropriate.
Other special kinds of trusts – such as trusts for the benefit of a disabled person – can be a mix of the elements mentioned above and can be treated in different ways for tax purposes.
Conclusion
If you would like advice about setting up a trust, or in connection with an existing trust, speak to one of our trust law solicitors today and find out how we can help. Contact us on 03456 465 465 or email enquiries@rotherabray.co.uk.
Part two: Do trusts protect assets from care fees?
Part three: Why set up a trust?
Disclaimer: This blog is for information only and does not constitute legal advice. If you need legal advice please contact us on 03456 465 465 or email enquiries@rotherabray.co.uk to get tailored advice specific to your circumstances from our qualified lawyers
