Trusts can be an important part of your tax planning toolkit. In this blog, we look at the four main types of trust, who each one is relevant to, and how to go about setting up your trust.
Trusts can be set up for a number of reasons; to control and protect family assets, to protect the affairs of a child or someone who’s incapacitated, or to pass on assets to others. A trust can ensure that the money and assets you leave to your loved ones can be accessed at the right time, by the right people, usually avoiding the delay and hassle of probate or the sting of inheritance tax.
Who Is Involved?
Three parties are involved in any trust.
- The settlor puts the assets into a trust
- The trustee(s) manage the trust and legally own the assets within it, on behalf of the beneficiaries
- The beneficiary/ies receive money from the trust, either through income or capital
What Types Of Trust Are There?
There are four main types of trust, which we outline here. Each type of trust is taxed in a different way, so the trust that is right for you will very much depend on your individual circumstances and those of your trustees and beneficiaries.
We strongly advise that you seek professional help from a specialist accountancy firm such as Warr & Co, who can look at the bigger picture, including but not limited to your current tax situation, tax planning and estate planning.
Life Interest Trusts
A Life Interest Trust is used to specify who has rights to your property after you die – it’s often used by families to ensure that family homes are properly passed on.
Typically, a Life Interest ‘Tenant’ will have the right to live in the property until a specified time (such as when they re-marry). Once this time has elapsed, the Life Interest Trust ensures that the property becomes the asset of the intended beneficiaries.
There are many variables surrounding a Life Interest Trust, so it’s best to sit down with an expert, discuss the possible scenarios and decide what should happen in each case.
Discretionary Trusts are used to help distribute gifts of money during your lifetime and/or after your death. Money within the trust is managed by a named trustee or several trustees, on behalf of the beneficiaries (such as children or grandchildren).
There are many reasons why Discretionary Trusts are used. Perhaps you wish your money to be divided depending on future states that you cannot know at this time, or you wish to leave money to a beneficiary but want someone else to take control of when and how that money is used.
Discretionary Trusts are popular due to their flexibility, but can be subject to a variety of taxes depending on how they are set up and run.
Accumulation & Maintenance Trusts
The Accumulation & Maintenance Trust is generally set up to help maintain children or grandchildren in case of your death. It allows for a set income to be paid to the beneficiaries, followed by the full remainder of the assets at age 25.
It is similar to the Discretionary Trust, needing a trustee or trustees to oversee matters – they may wish to make investments with the Trust, for example, and can manage how and when the money is used.
These trusts can also be ‘mixed’ to allow for children of different ages. In some cases a Discretionary Trust is more favourable for similar purposes. As you can imagine, this can become quite complex, which is why having an accountant oversee the trust is such a good idea.
In a Bare Trust, the beneficiaries are free to access the capital and assets of the trust as they wish. A trustee is appointed to oversee the trust and make sound investment and savings decisions, providing guidance to the beneficiary, but ultimately the beneficiary has access to all of the assets as they wish.
Bare Trusts are perhaps the most flexible type of trusts, but they can be quite heavily taxed. The tax picture will very much depend on each beneficiary’s tax situation, and if the settlor dies within seven years of setting up the trust there will be Inheritance Tax to pay in full as well. So, a Bare Trust isn’t always the preferred option.
What To Do Next
Request a free consultation with a specialist Warr & Co accountant using the below form; we can advise on the trust best suited to your particular situation and goals.
We will look at the big picture for you, including but not limited to your current tax situation, tax planning and estate planning. We can then set up your trust for you and even act as trustees or executors if you wish.