A simple guide to trusts

Many people who want to give their assets to their loved ones choose a trust to allow them to retain some control over their assets as part of their inheritance tax planning.

A trust comes in to existence when you give assets to people you choose (the trustees) to hold for the benefit of others (the beneficiaries).

A trust can be set up during your lifetime (by using a trust deed) or upon death (by inclusion in your Will).

There are many trusts designed for specific situations, but the common types are

• bare trusts – often used for trustees to hold assets for a child until they reach 18
• life interest trusts – giving an individual (known as a ‘life tenant’) the right to receive income only whilst preserving the capital for others after their death
• discretionary trusts – none of the beneficiaries has a fixed right to a particular share of the trust fund but the trustees have a discretion as to which beneficiary benefits and to what extent.  These trusts are frequently used to protect vulnerable beneficiaries.

A trustee has the responsibility for managing the assets of the trust for the benefit of the beneficiaries according to the terms of the Will or trust deed.  A trustee can be a friend or family member or a professional trustee which in some circumstances is useful, for example, to avoid a family conflict or where the responsibility of managing a trust is too much for a lay person.

Trusts are also a practical tool for inheritance tax planning and care home planning.  If the money is in a discretionary trust or a life interest trust, should the beneficiary require care, then under current rules, the money in trust may not be taken into account for care fees.  However, if the person who makes the trust requires funded care then the Local Authority may query the gift into trust if it is considered a deliberate deprivation of assets, as this is not permitted.

The legal wording of a trust needs to be precise and you should always seek advice from a lawyer to set a trust up.