Trust Planning

How many types of trust are there?

There are several types of trust in the UK, and all of them involve a trustee (trust administrator), a settlor (person who puts assets into a trust) and a beneficiary:

• Bare trusts – typically used to pass assets to young people, who can make use of them when they come of age.
• Interest in possession trusts – where a beneficiary has the right to income generated by the trust, but not the assets.
• Discretionary trusts – used to benefit people unable to deal with the money themselves, where the trustee decides how and when the capital is used.
• Accumulation trusts – where trustees can accumulate income within the trust, or pay it out as per discretionary trusts. Mixed trusts – a combination of more than one type of trust, where each part is treated according to the tax rules that apply to it.
• Settlor-interested trusts – where the settlor or their husband, wife or civil partner benefits from the trust. Basically, a trust for yourself.
• Non-resident trusts – where the trustees are not resident in the UK for tax purposes. The rules for these trusts are very complicated.

How can a trust protect home ownership when a spouse dies?

It is totally natural to assume that the best way for you and your spouse or civil partner to own your home is through joint ownership. However, when one of you dies and the whole ownership of the property passes to the other, this may leave your inheritance exposed to the costs of long-term care or open to re-allocation should your spouse remarry.

It is not widely known, but it may be wiser to own your home as ‘Tenants In Common’, so that your half of the property value can be placed in a trust upon your death. By doing this, your spouse only owns their share of the property and you are able to pass your share on to your children or another beneficiary. As your spouse will not own all of the home, it will help to be protected from demands on it for means testing and changes of ownership.

Can a trust ensure my legacy stays within my bloodline?

A trust is actually the most efficient way to ensure your assets cannot be diverted outside of your immediate family, and we most commonly find this strategy used to mitigate cases of marriage after death or the potential divorce of your children.

For example, you may unfortunately die before you reach a ripe old age, leaving your spouse alone. In the typical course of things, if you have arranged so in a Will, they inherit the entirety of your estate. A few years later, perhaps your spouse meets someone else who is kind to them and they fall in love and get married. Now, the new partner has joint ownership of what was once your estate. And if he or she has children, then they could be set to also inherit a sizeable portion of your assets upon their death, rather than your own children. If you would rather prefer your own children to inherit your assets, then you can place them in trust to achieve this.

How does putting assets into a trust reduce tax exposure?

Very simply, by putting your assets into a trust, you are placing them outside of your estate. The assets of a trust are run by the trustee for the benefit of named beneficiaries, which could be individuals, a charity, an organisation or even yourself – it depends on the type of trust. In effect, they are no longer your assets, and in this way you can start to reduce your overall tax burden. You may even be able to have a tax free income from a trust.