7 of The Most Common Questions About Trusts and Trust Funds
These are the most important questions about trusts to help you organise money, protect your assets and save tax
Trusts and trust funds are important legal and financial tools that can help individuals and families achieve a variety of objectives. Whether you are looking to protect your assets, provide for your loved ones, or support a charitable cause, a trust may be the right choice for you.
However, these complex structures can be confusing and intimidating, with many people having questions about how they work and what they can do. These are the five most common questions:
What is a trust?
A trust is a way of holding assets to benefit someone (known as a beneficiary) without that person owning and controlling the assets themselves. The assets within the trust, known as the trust fund, are managed by trustees for the benefit of the beneficiaries.
The trust is set up by an individual referred to as a settlor who will decide what type of trust to create, in what way the trust fund is to be used and who the beneficiaries will be.
Most frequently, trusts are set up in Wills. There are different types of trust, with one of the main types being a discretionary trust where the trustees have the authority to apply trust funds as they deem appropriate.
Trust assets aren’t limited to cash, they can also include property and shares.
Why create a trust?
Creating a trust allows for you to be able to give your beneficiary help with managing their assets. Some common reasons include:
- To manage assets for a beneficiary who is under 18 or who cannot manage their own affairs
- To benefit individuals while also protecting assets from being lost, for example, because of bankruptcy, divorce or mismanagement
- For tax reasons
What is the difference between bare, absolute and discretionary trust?
Bare Trust: In a bare trust, the trustees must look after the assets until the beneficiary attains 18. Then the beneficiary has complete control over the trust assets and income. The trustee has no discretion over how to manage or distribute the assets and must follow the beneficiary’s instructions. This type of trust is often used for simple arrangements where the beneficiary is a child.
Absolute or Life Interest Trust: An absolute trust gives the beneficiaries some protection from creditors or legal claims against them. The trustee has some discretion to manage the assets, but the beneficiaries have an absolute right to receive them at a certain age or on a specific date. This type of trust is often used for estate planning and protecting assets from potential creditors.
Discretionary Trust: A discretionary trust gives the trustee control over how to distribute the assets among a group of beneficiaries. The trustee has discretion over who receives what and when. This type of trust is often used for asset protection, estate planning, and for beneficiaries who may not be able to manage the assets themselves.
These are the three most common types of trusts. If you need more information about other types of trusts that are available, visit our Trusts webpage.
Who owns trust property?
The trustees are the legal owners of the trust property, however there are strict regulations setting out how they can deal with this. A trustee’s responsibilities include:
- Following the terms of the trust document
- Acting reasonably and fairly towards the beneficiaries and taking into account the needs of them all, although this does not mean that all beneficiaries have to be treated in the same way
- Avoiding any conflict of interest
- Not profiting from the trust
- Not delegating their powers except as allowed by law
- Exercising reasonable care and skill
- Keeping accurate records
- Informing adult beneficiaries of the trust and their interest in it, unless the trust is discretionary
Trustees should follow the terms of the trust, exercise independent judgment and always act in the best interests of the beneficiaries.
The trustees may have been given a letter of wishes by the settlor which can guide them in their decision making, although this will not be binding.
When will I inherit the capital in a trust?
Whether you will inherit the capital in a trust and when this will happen depends on the trust.
If you are the beneficiary of a bare or absolute trust, the trust document will generally set out the age at which you are to inherit.
If the trust is a life interest trust, then you will be entitled to the benefit of the trust assets during your lifetime, and on your death the capital will pass to the person chosen by the settlor.
If the trust is a discretionary trust, then the beneficiaries do not have a right to the capital. The trustees may decide to end the trust at some point, for example, if funds have dwindled or the trust has served its purpose, such as paying for the education of the beneficiaries. If the trustees do decide to terminate the trust, they will distribute the capital to the beneficiaries as they see fit.
What rights does a trust beneficiary have to trust funds?
Under a trust, beneficiaries do not have any rights to the trust funds unless the trust deed says they have rights. The trust deed will set out if and how the trustees have the power to award money and to whom.
Under a bare trust, named beneficiaries are entitled to all of the trust capital and income when they attain 18. Under an absolute trust the beneficiary will receive the capital at the specified age which can 18 or 21 or older.
Trust beneficiaries are entitled to be told of the existence of a trust and the type of interest they have in the trust assets, which could be a fixed interest, an interest in the remainder or a contingent interest.
Those named as beneficiaries in discretionary trusts are only potential beneficiaries as there is no legal requirement to pay trust funds to them. This means that they do not have to be told of the existence of the trust unless they are likely to benefit from it.
Beneficiaries can also expect to be told who the trustees are, to include any new appointments and to be provided with trust accounts showing the extent of the trust fund.
Beneficiaries are not usually entitled to see letters of wishes, communications between trustees, communications with other beneficiaries or information in respect of trustee meetings.
What should I do if I need help to set up, or manage a trust fund?
At Burt Brill & Cardens we are specialists in the law regarding trusts and trust funds. We represent beneficiaries, settlors and trustees in dealing with trusts, providing legal advice and representation in respect of a wide range of issues.
We will be happy to answer your queries on how to set up a trust and connect you with solicitors with the expertise to help. We also have more information available on our webpage, Setting up a Trust.