21 January 2019
Setting Up A Trust Fund
Trusts are increasingly being used by individuals and business owners who want to protect their wealth and assets. While they were once seen as complicated and only for landed aristocrats, these days trusts are easy to set up and a practical way to determine how wealth will be passed on to the next generation.
First things first: what is a trust? Simply put, it’s a way of managing money, property or other assets. It allows trustees (such as family members, lawyers, bankers, etc.) to hold assets on behalf of beneficiaries.
People set up trusts for lots of different reasons:
- Passing on wealth
- Protecting family assets
- Provide for under-18s or vulnerable individuals
- Tax planning
You might be concerned about leaving gifts in your will to a family member who is vulnerable or whose relationship is in trouble. Would the beneficiary use their inheritance wisely? Would it end up outside the family post-divorce?
One solution is to use a discretionary trust. It’s a very flexible way of leaving assets where there is uncertainty about future events. The trust would have a group of potential beneficiaries but none of them is entitled to any defined share in the trust fund – they just have a hope of benefiting. The trustees (who will usually also be the executors of your will) decide who receives what and when. This is the ‘discretionary’ element.
You are able to provide guidance to the trustees by a ‘letter of wishes’ as to how you would like them to exercise their discretion. But it is important (for tax reasons) that the trustees are not bound to follow your letter of wishes. They must exercise their own discretion while taking into account your expressed views.
A trust is created by a legally-binding trust document. You need to consider carefully how the trust is structured and set up, because there can be capital gains and income tax implications, although with suitable planning these can be limited if not avoided altogether. There is also a potential inheritance tax charge, and an anniversary charge every 10 years, as well as charges when capital is paid out to beneficiaries. Again, careful planning should mean that these are minimised.
Note
For more information about making a trust, click here.