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Trusts
What is a 'trust'?
A trust is an obligation binding a person (which can be an individual or a company) called a 'trustee' to deal with 'property' in a particular way, for the benefit of one or more 'beneficiaries'.
What is a 'trustee'?
Trustees are the legal owners of the trust property. They are legally bound to look after the property of the trust in a particular way and for a particular purpose. Trustees administer the trust and in certain circumstances make decisions about how the property in the trust is to be used.
The trust can continue even though the trustees might change, but there must normally be at least one trustee.
What is 'property'?
The property of a trust can include
money investments land or buildings other assets, such as paintings. What is a 'beneficiary'?
A beneficiary is anyone who benefits from the property held in the trust. There can be one or more beneficiaries, such as a whole family or a class of people, and each may benefit from the trust in a different way.
For example, a beneficiary may benefit from
the income only, or the capital only, or both the income and capital of the trust. What is a 'settlor'
A settlor is a person who has put property into the trust. Property is normally put into the trust when it is created, but it can also be added at a later date.
How is a trust created?
Normally a trust is created by a deed. A settlor might ask a professional adviser to draw up a trust deed, which then sets out the terms of the trust.
A trust can be created under the terms of a will, when someone leaves instructions that when he or she dies some or all of the estate is to be placed in trust. A trust can also occur if a person dies without leaving a will.
Sometimes the Courts will create a trust, for example, when deciding how to deal with property for the benefit of a child or an incapacitated person who cannot manage his or her own affairs.
What are my responsibilities as a trustee?
Your responsibilities depend on the type of trust and the terms under which the trust is created. The settlor may have given instructions that trustees carry out various functions, and trust law may impose further obligations.
For taxation purposes you are responsible for
notifying the Inland Revenue that tax is due, within six months of the end of the tax year for which it is due, where you have not received a tax return for the year keeping records of the income and capital gains of the trust completing and sending back any tax return issued to you paying any tax due on the income or capital gains of the trust supplying certificates or vouchers to the beneficiaries to show how much income they have received from the trust in the tax year and how much tax the trustees have deducted. (Inland Revenue Trusts can supply forms for you to use.) Depending on the terms of the trust deed, you can appoint a professional adviser, such as a solicitor or accountant, to carry out some or all of these tasks. However, if you do, you are still responsible for ensuring that all tax obligations are carried out satisfactorily.
The different sorts of trusts
There are a number of different sorts of trusts, but usually they fall into one of the following categories
bare trusts interest in possession trusts discretionary trusts accumulation and maintenance trusts What is a 'bare trust'?
A bare trust is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.
The property is held in the name of a trustee, but that trustee has no discretion over what income to pay the beneficiary. In effect, the trustee is a nominee in whose name the property is held and has no active duties to perform.
What is an 'interest in possession trust'?
This type of trust exists when a beneficiary, known in this case as an 'income beneficiary', has a current legal right to the income from the trust as it arises. The trustees must pass all of the income received, less any trustees' expenses and tax, to the beneficiary.
The income beneficiary need not, and often does not, have any rights over the capital of such a trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future or after a specific future event. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.
A beneficiary who is entitled to the trust capital is known as the 'remainderman' or the 'capital beneficiary'.
Example
Stanley is married to Kathleen. On his death Stanley's will creates a trust and all the shares he owned are to be held in that trust. The dividends earned on the shares are to go to Kathleen for the rest of her life, and when she dies the shares pass to the children or grandchildren.
Stanley is married to Kathleen. On his death Stanley's will creates a trust and all the shares he owned are to be held in that trust. The dividends earned on the shares are to go to Kathleen for the rest of her life, and when she dies the shares pass to the children or grandchildren.
Kathleen has an 'interest in possession' in the trust as she is entitled to the income (the dividends) arising on it for the rest of her life. Unlike Juliet in the bare trust example, Kathleen has no right to the capital, so when she dies the trust ceases and all the capital (the shares) passes to her children or grandchildren (the remaindermen).
What is a 'discretionary trust'?
Trustees of a discretionary trust generally have 'discretion' about how to use the income of the trust. They may be required to use any income for the benefit of particular beneficiaries, but the trustees can decide
how much is paid to which beneficiary or class of beneficiaries payments are made how often the payments are made what, if any, conditions to impose on the recipients. The trustees may, or may not, be allowed to 'accumulate' income within the trust for as long as the law allows rather than pass it to the beneficiaries. Income that has been accumulated becomes part of the capital of the trust.
Example
Kathleen puts money into trust, to be held for 20 years, for the benefit of her two grandchildren, Charlotte and Amy.
Kathleen puts money into trust, to be held for 20 years, for the benefit of her two grandchildren, Charlotte and Amy.
The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren. So, when the children are young, the trustees might decide to pay for piano lessons for them. As they get older, the trustees might pay towards a wedding. After 20 years, the trustees wind up the trust and distribute all of the money to Charlotte and Amy.
What is an 'accumulation and maintenance trust'?
An accumulation and maintenance trust is one in which the beneficiaries will become entitled to the property or at least the income when they reach a certain age (no more than 25). The trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property.
Trustees of an accumulation and maintenance trust are given power to 'accumulate' the income of the trust until a certain date, at which time the beneficiary, or beneficiaries, are entitled to the property of the trust or to the income arising from that property.
In England and Wales, the beneficiary (unless the terms of the trust say otherwise) becomes entitled to the income from the property held in the trust when he or she reaches age 18 and an interest in possession trust is created at that point.
The position in Scotland is different, as there is no equivalent entitlement to the income of the trust at age 18. However, Scots law limits accumulation periods so accumulation and maintenance trusts will often end when the beneficiaries reach the age of majority.
Example
Bill puts money into an accumulation and maintenance trust for the benefit of his grandson Andrew.
The trustees can make payments to Andrew from the trust for his maintenance and will accumulate any remaining income. The terms of the trust give Andrew the capital and any accumulated income at the age of 25. So on his 25th birthday Andrew is entitled to all the money at that date.
Other Types of common Trusts
There are also a number of trusts available from insurance companies which can be wrapped around investments as part of your inheritance tax planning strategy. These trusts are set up in a way where you are still able to access an income or your capital. Loan Trusts and Discounted Gift Trusts are typical of these types of trust.
If you wish to discuss the above further or require information on any of our services, then please contact us.
Any reference to legislation and tax is based on FPP’s understanding of UK law and HMRC practice. These may be subject to change in the future. Tax rates and reliefs will also change and their value to you will depend on your individual circumstances. No guarantees are given regarding the effectiveness of any of the above strategies.