Uses of Trusts

Under English law, ownership of property (this is any asset, rather than just ‘real’ property
such as land or buildings) may be divided in two: legal ownership and beneficial ownership.

A trust, or settlement, gives to the trustees the legal ownership of property to hold that
property for the enjoyment of the beneficiaries.

There are several types of trust, some of which are quite specialised or unusual.

A common one is a bare trust, possibly the simplest type of trust, where a person or persons
(the trustees) hold the assets specifically for the benefit of another person (or persons) who,
for whatever reason, are unable to hold the asset in their own name.

An example of this might be where, in his Will, someone has left his house jointly to his
grandson and granddaughter, and these grandchildren are, say, respectively 4 and 6 years old.

Legally they’re unable to hold the house in their own name and unable to sign a contract for

Accordingly the trustees, who will have been appointed in the Will, will have the house
transferred into their own names as trustees.

Although they are the legal owners, they can’t benefit from these assets themselves, as
they’re merely holding them “on trust” for the benefit of the grandchildren.

If somebody is the beneficiary of a life interest in something – again it could be a house – then
this means that they have the right to live in it during their lifetime but, on their death, they
cannot leave it to anyone because they do not own it – they only had a right to live there.

It is common in such a scenario for a person making his Will to leave his home to his second
wife for life and that, on her death, it passes to his children from his first marriage.

The trust may give it to a person absolutely on the death of the person with a life interest, or it
may give a new life interest to another person. There will be a tax implication at that time,
and it is important that advice from a professional tax adviser is sought in this situation.
These trusts are frequently used in Wills, often when the person making the Will (‘the
testator’) is a widower who has remarried.

Discretionary trusts can be very useful indeed. In these trusts, the trustees have a discretion
as to who, from the class of beneficiaries named by the person who set up the trust (‘the
settlor’), is to benefit from the assets in the trust and to what extent.

Discretionary trusts can be set up in a Will or during the lifetime of the deceased.

If it is the latter then the settlor can be one of the trustees. For example, the settlor may have
surplus funds that he would like to transfer out of his estate so that these won’t be liable to
inheritance tax on his death.

However he may not want the assets to pass to his children or grandchildren immediately.

In addition, it may be his wish that a child who pursues further education or takes a
worthwhile but poor-paying job is to benefit more than a child who is in a well-paid job, but
of course at present he doesn’t know what paths each will follow.

As long as neither he, nor his wife or civil partner, is a potential beneficiary under the trust,
as soon as the funds leave his estate and are transferred into the trust, the ‘clock’ starts to run
for inheritance tax. and, all being equal, will no longer be included at his death as long as he
survives for seven years.

However, he may decide to retain some or all of the assets (or funds) in the trust for as long
as he wishes and need not make payments to his children (or grandchildren) for many years,
and can decide at that time how much each should have.

Even if he should die before transferring the assets, the trust will remain in place as long as
it’s needed.

If he had simply kept the assets himself and waited until his children reached the age where
they continued studies or took jobs before making the decision, the ‘seven year clock’ would
not have started running until he transferred the assets.

Lifetime discretionary trusts can significantly increase the value of your Estate which you can
pass down the generations without Inheritance Tax being payable, but without having to give
these away to a specific person or persons now.

If you feel that this might be suitable for your particular circumstances, contact us, and we’ll
be happy to explain more.

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