Setting up a trust – what to consider

Benefits of setting up and trust and understanding the different types of trusts

Setting up a trust can be one of the most effective ways to protect your assets and ensure they are distributed according to your wishes. Whether you are planning for your family’s future, reducing tax liabilities, or safeguarding assets for vulnerable beneficiaries, getting tailored legal advice is essential to make the right decisions at the right time.

What is a trust and why set one up?

A trust is a legal arrangement where assets are held by one party (the trustees) for the benefit of another (the beneficiaries). Trusts offer flexibility in managing and distributing assets and can provide a range of benefits, including:

• protecting assets for future generations;
• reducing exposure to Inheritance Tax (IHT);
• safeguarding assets for vulnerable or young beneficiaries;
• facilitating charitable giving; and
• ensuring assets are used in accordance with your wishes.

Types of trust

There are various types of trust, each designed for specific purposes. Common examples include:

• Bare trusts: these provide simple asset holding for beneficiaries who are entitled to the assets outright.
• Discretionary trusts: trustees have discretion over how and when to distribute assets, offering flexibility and control.
• Life-interest trusts: these allow a beneficiary to receive income from the trust during their own lifetime, with the capital passing to others after their death.
• Charitable trusts: these can be created to support charitable causes, often offering tax advantages.

The choice of trust depends on your objectives, family circumstances, and tax considerations, which we will discuss with you. Each option has its own legal and tax implications, so it is important to seek advice tailored to your situation to ensure the best outcome.

A trust can be established either during your lifetime (a ‘lifetime trust’) or through your Will to take effect upon your death (a ‘Will trust’). Both options have distinct advantages and tax implications as set out below.

• Lifetime trusts: these are particularly useful for proactive estate planning. If you transfer assets into a lifetime trust more than seven years before your death, they may no longer count towards your estate for IHT purposes. However, lifetime trusts can be subject to additional taxes under what is called the ‘relevant property regime’. This regime imposes periodic charges (every 10 years) and exit charges when assets are taken out of the trust. It is crucial to understand the impact of these taxes and seek advice to understand the potential benefits and costs for your situation.
• Will trusts: these take effect upon your death and are funded by the assets in your estate. While Will trusts are subject to IHT at the time of death, they can be structured to take advantage of reliefs like the nil-rate band and the residence nil-rate band.  For example, a Will trust might protect the family home for children while allowing a surviving spouse to benefit from the property during their lifetime. This approach can be particularly useful for blended families, where there are children from a previous marriage. A Will trust can ensure that assets are preserved for specific beneficiaries while still providing for the needs of a surviving spouse, balancing fairness for all parties.

Understanding the structure and purpose of a trust is key to achieving your goals. This includes aligning the trust’s objectives with your long-term plans, your IHT position, whether the assets are intended to be distributed over a certain period or preserved for future beneficiaries. Consideration should also be given to your stage of life and financial circumstances when setting up the trust, balancing present needs with future intentions.

Careful thought should be given to potential risks, such as relinquishing control over assets you might later need or regret transferring. Collaborating with your solicitor and independent financial advisor (IFA) can help address these considerations and ensure the trust aligns with your overall estate planning strategy.

Both types of trusts require careful planning to navigate the complex tax landscape and, along with legal and IFA advice, tax advice should also be sought to advise on the tax consequences.

Lifetime trusts may offer tax efficiency for those willing to relinquish immediate access to assets, while Will trusts are ideal for ensuring that your estate is distributed in line with your wishes after your death.

What your solicitor needs to know

To help you set up a trust, your solicitor will need detailed information about your assets, objectives, and family circumstances. This includes:

• the type and value of assets to be placed in the trust;
• the intended beneficiaries and their specific needs;
• your tax planning goals;
• any potential complexities, such as business or overseas assets;
• family dynamics, potential disputes or likely objections to the trust amongst beneficiaries;
• who the trustees should be and whether their consent to act should be sought for a future appointment;
• provisions for vulnerable or minor beneficiaries, for example funding care for a disabled child; and
• your preferences for how the trust should be managed and overseen by the trustees and whether any restrictions should be imposed on the trustees.

Additionally, for most trusts, you will need to ensure compliance with legal obligations, such as registering the trust on the Trust Registration Service (TRS). Failure to register a trust can result in penalties, so it is important to understand whether this applies to your situation and complete the necessary steps promptly. A thorough discussion with your solicitor can help identify potential challenges and ensure the trust is tailored to meet your unique circumstances.

How we can help

We have extensive experience in setting up trusts and guiding clients through the legal and tax considerations. Our team can help you:

• choose the right type of trust for your needs;
• navigate the legal process of drafting the trust;
• understand the tax implications and potential benefits;
• ensure your wishes are clearly documented and enforceable; and
• register the trust on the HMRC Trust Registration Service.

For more information or to discuss setting up a trust, contact Sallyann Short in our private client team on 01733 882800 or via email at [email protected].

Sallyann Short, Partner

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