Trust Funds

What is a Trust?

A Trust is a legal structure that enables money or assets to be held by ‘Trustees’ for at least one other person who are ‘Beneficiaries’.

A Trust Fund might be needed because an individual recipient may be a minor or a vulnerable adult who is legally unable to hold that money or asset themselves. A Trust may also be in place through a life assurance policy or pension pot. Trusts can be created during the lifetime of an individual or on death. There are many types of Trust:  Charitable Trusts, Private Trusts and Public Trusts, Onshore Trusts and Offshore Trusts, Bereaved Minor Trusts, Disabled Trusts, Discretionary Trusts, Fixed Trusts, Interest in Possession Trusts and many more.

What are the Rules of a Trust?

Different rules apply to each type of trust, different taxes apply to each, and different reporting requirements apply to each. Trusts can be flexible or rigid and serve many purposes and people well in various situations. However, Trust law is both complex and precise.

Any advice related to Trusts should be specifically looked at, whether acting as a Trustee or setting up a Trust. The responsibilities of Trustees are huge, and the risks associated with the mismanagement of Trust funds, often through a failure to fully understand the duties and obligations, are great.

There are also different income tax, capital gains tax, inheritance tax and SDLT consequences for various types of Trust.

All these must be weighed carefully and properly by the person creating the Trust (the Settlor) and the Trustees managing the Trust. The help of financial advisors, an appropriately STEP-qualified lawyer and an accountant may all be needed to provide the best advice for anyone creating or managing a Trust to ensure legal compliance and the correct creation of the most appropriate Trust structure to meet the needs of the Settlor.

Most Trusts must be registered on the government Trust Registration Service (TRS). Strict time limits apply. Details required for this are comprehensive and must be kept up to date whenever the Beneficiary/ies status changes or Trustees retire or die, and new ones are appointed. Penalties are payable for failure to register a Trust and to keep the TRS current.

Types of Trusts

Family Trusts

Trusts are often created by wealthy individuals and businessmen during their lifetime who may wish to preserve the family’s wealth for future generations. There will be tax advantages and disadvantages for each and these must be fully explained, understood and taken into consideration for anyone considering establishing a Trust and anyone acting as a Trustee. These are known as Family Trusts.

Charitable Trusts

Wealthy businessmen and women may also be philanthropists and wish to support or create a charitable foundation through the form of a Charitable Trust.

Foundation Trusts

Foundation Trusts are founded within the NHS and provide a structure whereby services are run for service users by members of the public, including patients and staff. It enables decisions away from centralised government. The aim is such Trusts can look at supporting the needs and requirements of the particular areas served. The Trustees of the Foundation Trusts have more of a say in how money is spent and the services provided.

Trusts of Land/Property

Jointly held assets, such as houses, land and bank accounts are automatically held by the joint owners as Trustees. They can hold these as joint tenants or tenants in common. The way in which these assets are held determines whether the assets either pass to the survivor/s on the death of one party or in accordance with the will or intestacy upon that death. Houses and land can also be put into Trust for other/s and for different reasons. These are particularly attractive if managing and running a home is becoming increasingly difficult for the owner/s and they may wish to hand over control for these matters as well as preserve it for future generations. However, care needs to be taken to ensure such a trust is not construed as deliberate deprivation ( see below Asset Protection Trusts), nor that it falls into the hands of individual/s who may themselves be struggling financially, whose marriage may be shaky or who themselves are vulnerable and not good with money. Should this happen the asset itself may inadvertently fall into the hands of a third party such as a divorced spouse or Trustee in bankruptcy on the divorce or bankruptcy of a Beneficiary.

Trusts in Wills/during lifetime

Trusts are often created by wills where the person making the will doesn’t want any one individual to get their hands on the money until a certain time or event. Or the Settlor may simply wish to protect family money from the potential reach of creditors, former partners of beneficiaries, or even ensure potential beneficiaries continue to receive ongoing access to means tested benefits and all the benefits that flow from these. It may be that the Settlor has a child/ren from a former marriage or relationship for whom they wish to provide after the death or remarriage of their current partner. The most common form of Trust used for the first scenario is likely to be a Discretionary Trust (DT) and in the second either a simple Interest in Possession Trust (IIP Trusts) or a combination of both an IIP Trust and a DT.

Trusts for Minors

Any money/assets given to a minor under a will or intestacy must be held in Trust for them until they reach majority.

Asset Protection Trusts

Sometimes people wish to use trusts as a form of avoidance of paying for possible future care fees This might be advertised as an Asset Protection Trust or Wealth Preservation Trust. However, a Trust must have a legitimate purpose and avoidance of future care home fees or care costs is not a legitimate purpose. There are serious consequences of making a Trust with this in mind, as the Local Authority will dig down into the motivation for such a Trust. This is because putting money into a Trust takes it out of the Settlor’s pocket and therefore out of reach for assessments for funding. However, the Local Authority can go back and look at and make an assessment based on that money purposely put outside their reach, and assess this for the purposes of determining contribution towards care fees. There is no time limit beyond which the Local Authority may go to make such an assessment. Just as with any other gift, this can be assessed as deliberate deprivation and therefore be included in any calculation to determine a contribution towards care costs and funding. Furthermore, by putting it into this type of Trust, it can if not properly created, also put the Settlor themselves in a position of great financial hardship. It might also lead to unintended tax consequences that can prove detrimental and punitive to the Settlor.   There are serious disadvantages to this type of Trust if proper consideration is not made of the reasons for creating a Trust and care is taken in ensuring these reasons are legitimate and watertight.

Often these types of Trusts are advertised as the panacea for avoiding care fees and may be advertised as such. However, if it sounds too good to be true, it probably is! It is absolutely vital to take specific legal advice from someone properly qualified to undertake this sort of work and who is able to explain fully all the consequences of such a Trust. 

Development Trusts

A Development Trust is a specific type of Trust established by and for community organisations for health and social purposes, ownership and management usually of land and buildings working towards the improvement of health and development of their community. These types of Trust tend to work closely with private businesses, community groups and the public sector and often operate in areas of economic deprivation.

If you’re wanting advice on any Trust matter, a specialist should always be sought. It is a highly specialist and technical area of law and should never be dabbled in. Anyone who is STEP qualified carrying the letters TEP after their name should have the necessary knowledge to comprehensively advise you on a trust question.

Certain types of trust can be useful in enabling a beneficiary to retain the benefits to which they are entitled. For example, a Disabled Persons Trust or a Discretionary trust when correctly drafted and correctly administered by the trustees will ensure any money paid out to the beneficiary from the trust does not infringe any rules that lead to withdrawal of state means-tested benefits and any other entitlements which flow from such benefits.     However, where trusts leave defined amounts to beneficiaries who are on means-tested benefits, this can prove detrimental to their ongoing entitlements if it increases their income and capital entitlement over the threshold for qualification.