A trust may be expressly created during lifetime or may be included within a Will, it may also arise by operation of law (implied trusts) or established by the Courts after assessing the behaviour of individuals (resulting or constructive trusts). It is widely known that many types of trusts exist but many clients will not know the answer if you simply ask them whether they want to create a trust.
A client may have heard of the use of trusts in a variety of forms and their response to the suggestion of using a trust will vary from ‘I have heard it is a good way to save tax’ to less favourable responses if their only experience is by reading Dickens ‘Bleak House’.
The suggestion of using a trust often therefore comes from the advisor rather than the client, as a way of meeting the client’s overall objectives. These can include the following:
Protecting Assets The client may have assets that they have built up during their lifetime that they want to ensure their assets aren’t dissipated by wayward beneficiaries or spendthrifts. This is also important where the assets need to provide for different groups of beneficiaries (such as a surviving spouse and children).
Protecting Beneficiaries Some beneficiaries may not be able to manage their own assets (such as disabled children) and a trust can be a means of ensuring that the funds are used in the beneficiaries best interest rather than in the interests of a carer or ‘friend’ of the beneficiary.
Retaining Control The ability to transfer assets out of personal ownership but control their use may be attractive to clients. This is often the case where a gift is made during lifetime rather than on death. The donor can act as a trustee and retain control of the trust fund. In Will trusts the client can dictate when beneficiaries are to receive their gift and allow management of the assets by the trustees in accordance with the testator’s wishes.
To Treat Income and Capital Differently Again allowing the treatment of different classes of beneficiary to be treated differently such as provide income for a surviving spouse while preserving the capital for other beneficiaries.
Particularly important to those who have family from other relationships or there is a likelihood of that occurring. Likewise care can be provided for an elderly relative or for those who are too young to manage their own financial affairs.
To Save Tax Creating trusts can help to minimise the estate that is subject to IHT or avoid a costly CGT bill by transferring assets to a relevant property trust.
To Avoid the need for Probate Transferring assets into a trust during lifetime ensures that those assets are readily available after the settler’s death.
There is no requirement to wait for a Grant of Probate and avoiding this delay may also avoid financial hardship for the beneficiaries.
To provide the best advice on trusts a Will writer should explore the reasons motivating a client to do estate planning and the objectives they want to achieve.
This will establish whether a trust is a suitable solution and which type of trust should be recommended.
