Trusts are one of the most valuable financial planning tools, but they are also one of the least-well understood. On this page we explain what a trust is and why they are used. We then look at some of the different types of trust and how they work.
A trust is similar to a treasure chest – it’s a safe, locked box holding valuable contents for somebody else’s benefit. The person who wants to set up the trust puts cash or other assets into the treasure chest and locks it.
The keys to the treasure chest are held by trustees (usually including the person who sets up the trust). The trustees can unlock the treasure chest, change the assets inside and distribute the contents in line with the terms of the trust.
There are three key roles within a trust - the settlor, the trustees and the beneficiaries.
The settlor, or truster in Scotland, is the person who establishes and puts assets into the trust. Settlors are usually individuals or couples.
The trustees are the people who control and oversee the trust. Anybody can act as a trustee as long as they are over 18 and have full mental capacity. Often the settlor will act as a trustee to keep an element of control over the trust.
The beneficiary of the trust benefits from the arrangement. For example, they may receive money from the trust or the right to occupy a property. Certain trusts give the trustees discretion over how and when these benefits are given to beneficiaries.
Different types of trust are subject to Income Tax, Capital Gains Tax and Inheritance Tax in different ways. The rates and allowances vary according to the type of trust and how the beneficiaries stand to benefit from it.
Download our guide to trusts for more information about what trusts are and how to use them
There are many different types of trust, each with different purposes and tax rules. Some of the most common types of trusts are:
Our financial planners can tell you more about the benefits of trusts and whether you should consider setting up a trust. Book a no-obligation consultation to find out more.
A trust lets you keep control over the assets you placed in it. A common example is when somebody marries for the second time but has children from their first marriage. Usually they want to ensure their second spouse is taken care of for the rest of their life, after which the money will pass to their children from the first marriage. A trust lets them do this.
Trusts offer a means of protecting assets for the beneficiary. An outright gift given to a beneficiary who then divorces or goes bankrupt could be lost. However, if a gift is made into a trust under which a beneficiary has no right to the income or capital, then that gift is much less likely to be taken into account.
Trusts offer a useful way to save Inheritance Tax without having to make an outright gift to another person. If you place assets into a trust to which you cannot benefit, after seven years the assets will fall outside your estate for Inheritance Tax purposes. Any growth on the assets will immediately be outside your estate.
Usually, after you die any Inheritance Tax and probate fees must be paid before your assets can be distributed in line with your Will. However, the executors of your Will can’t access your assets until probate is granted – so they must find the money from elsewhere. As a trust is separate from your estate, your trustees can immediately access any money held in it and use the money to pay the Inheritance Tax bill and probate fees.
Advice in relation to trusts is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts may be regulated.