Back to Basics: What is a Trust?

You’ve heard of them. You think they might save you tax. You think you might want one. But what exactly is a Trust and how can it be of benefit?

Put simply a Trust is an arrangement where a person or persons (called Trustees) are under an obligation to hold assets for the benefit of another person or persons (called Beneficiaries). If you create a Trust then you are known as the Settlor.

Trusts are useful in a variety of different circumstances.

A Trust can be a way of holding assets for the benefit of a child or other person under the age of 18. A minor Beneficiary cannot deal with the assets themselves so a Trust is a legal way for ownership to be in other hands until the child attains majority.

In some cases Trustees have a choice over who can benefit from the Trust and this is known as a Discretionary Trust. This could be useful where if the Settlor does not want one or more Beneficiaries having absolute entitlements perhaps because they are in receipt of means-tested benefits, are experiencing financial problems or are going through a divorce. But care is needed to ensure the Trust cannot be attacked as a sham for merely putting assets out of the reach of others (including the tax man!).

And there can also be Trusts giving Beneficiaries rights to income but not capital, as well as being a vehicle to receive Personal Injury damages.

How Trusts are taxed is complex. A Trust is a legal entity in its own right and, depending on the assets in the Trust and how it is set up, is liable to pay all the usual taxes: income, capital gains and inheritance tax.

Trusts can be set up during the lifetime of the Settlor or also in a Will to take effect after a person has died.

There can be real benefits with having a Trust but careful advice and planning is required before you make one.