Trusts are legal arrangements you can be set up during your lifetime – sometimes referred to as Settlements- or in your Will – normally called Will Trusts. Instead of making outright gifts a settlor (during their lifetime) or testator (trust is created in their Will and is constituted on the testator's death) would create a trust to transfer assets to their trustees who will manage the trust property for the beneficiaries of the trust.
One of the advantages trusts offer, unlike outright gifts, is their flexibility and a range of trusts exist to suit different situations and requirements. Whether it is to protect a vulnerable family member or to protect assets in the event of re-marriage, divorce or bankruptcy, care fees or to mitigate inheritance tax, trusts can be essential estate planning tools to achieve your objectives.
There would normally be a number of uncertainties including the financial and personal position of the beneficiaries when you are planning your Will. .Where a fixed gift will be blind to those factors, a trust can help to delay decisions until a later date to best suit the beneficiaries' needs and circumstances.
It is essential to understand the implications of setting up a trust and I can help with assessing your circumstances and provide advice and assistance on whether a trust is suitable and if so what is the best arrangement for you and your family.
Below you will find situation in which trust can help protect your family and your assets.
Parents would want to protect their children who are still financially dependent the best possible way, in the event of their untimely death. In this instance, a discretionary trust offers the possibility for the parents' estate to be used for the benefit of the children along the same lines as the parents might have used their resources if they had been alive. The children’s needs and requirements would depend on their age, abilities, etc. and unlikely to be identical and so would be the needs for income and capital. At the time of death one child may be at school or college while another child may be in employment. A discretionary trust offers the flexibility to use the assets to meet the children’s specific needs as they emerge in the future. Discretionary trusts offer the greatest flexibility possible to allocate assets and income according to the beneficiaries’ changing needs.
Alternatively, parents may set up a bereaved young person’s trust for their children to receive their inheritance (capital and income) no later than on attaining the age of 25. Most parents would prefer deferring their children’s entitlement to capital beyond the age of age 18 which is the statutory age children will otherwise receive their inheritance if a parent dies intestate (without a Will).
Other options parents have include setting up a trust with the right of income for the minor beneficiaries until such age they can receive their capital.
It is therefore important for parents with young children making a Will to make adequate protection for their minor children tailored to their family circumstances and any special needs the children may have.
Marriages, second marriages - or civil partnerships- with children and stepchildren
A testator, testator married to their second -or third- spouse who has children from a previous marriage may wish to provide for their spouse but make sure that their assets will ultimately benefit the children, when the spouse dies. This may also apply to a married couple wishing to protect the surviving spouse while ensuring the assets pass to their children on second death.
These are situations where a trust can help the testator to achieve both aims. A trust can provide for instance, for the spouse to continue to reside in the family home and if necessary for the home to be sold and be replaced for another suitable, and for the spouse to receive the income from the trust property, for instance from savings or investments.
This trust is normally drafted so as to end on death of the surviving spouse however it can be terminated earlier, for instance on marriage of the spouse should this be the testator’s requirement. This trust can also be drafted so as to enable the trustees to appoint capital to the surviving spouse or children giving greater flexibility to accommodate the future needs of the family.
Grandparents wishing to provide for their grandchildren for instance, to contribute to their education, may wish to create a trust instead of giving an outright gift since a Trust would offer the opportunity to accommodate the grandchildren’s future needs and requirements.
Grandparents can create a flexible discretionary trust for their grandchildren giving their trustees powers to distribute income and capital as their think fit, or may wish to create a trust to give an outright right of income to their grandchildren with power to trustees to appoint capital to them as and when needed. The latter, called Immediate Post-Death Interest Trust may be the more suitable option for larger estates where the Residence Nil Rate is required to mitigate inheritance tax.
Disabled and Vulnerable beneficiaries
Providing for a disabled or vulnerable family member requires special care since they may be unable to independently take care of their financial affairs. Thus a disabled person’s trust would allow trustees to manage the trust funds. An absolute gift to a beneficiary who is unable to manage their property and affairs would normally require the appointment of a Deputy by the Court of Protection, to manage their affairs for them. The appointment of a Deputy inevitable imposes formal procedures and may involve substantial costs, and may be avoided where possible.
A disabled or vulnerable person may also be reliant on welfare benefits which would otherwise be affected by the receipt of additional funds or income, since the benefits system discourages gifts of capital and penalizes beneficiaries entitled to income.
A trust also offers additional protection in connection with care fees since the assets in the trust would not be part of the beneficiary’s estate when assessing their contribution to care fees.
A testator may wish to leave assets to a beneficiary who has however difficulties managing large sums of money responsibly. In this case leaving assets to them direct may not be appropriate. By creating a protective trust instead, a testator can ensure that such beneficiary will receive the financial support intended for them, while securing that the funds will be managed responsibly by the trustees.
If your child, spouse or other family members you wish to protect have difficulties managing property it will be unwise to gift large sums of money or assets to them, but you may still wish them to benefit from your estate, when you die. The basis of this protective trust is the determinable interest given to the beneficiary with a history of bankruptcy or subject to a relief order.
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