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A Guide to Trusts

If you’re looking to transfer assets to a close friend or family member, then you might have considered using a legal entity known as a trust. This helps to avoid some of the complications which might arise from the transfer of property from one person to another.

What are trusts?

A trust is a legal means of protecting assets, and ensuring that they are distributed according to the wishes of the person providing those assets.

Who is involved?

A trust necessarily involves at least three parties.

The settlor

This is the person who provides (or ‘settles’) the assets.

The trustee

This is the person who will be looking after the assets on behalf of the settlor.

The beneficiaries

These are the people who will ultimately receive the asset.

Of course, there are many different ways in which these parties can be arranged, and interact with one another.

Types of trust

It’s worth treating ourselves to a brief overview of the various kinds of trust on offer.

A bare trust

This is the simplest variety of trust. It provides the beneficiaries with all of the assets the moment they turn eighteen (in England and Wales) or sixteen (in Scotland). Consequently, the assets in trust will always go to the beneficiary.

Interest in possession trust

This variety of trust allows the beneficiary to immediately gain an income from the assets without controlling the assets themselves. It’s typically used for the benefit of widows and widowers.

Discretionary trust

This kind of trust empowers the trustee with some discretion concerning how assets are distributed. The extent to the discretion will be set out as the trust is established. The trustee might, for example, decide to provide beneficiaries with assets in intervals, rather than doing so all in one go.

Mixed trust

This kind of trust combines some of the above into a bespoke package. Mixed trusts can be complicated, but with the help of a competent trusts lawyer, they might be the most appropriate solution for your circumstances.

Benefits of a trust

So, why might we use a trust? There are a few substantial benefits.

Firstly, a trust will ensure that the assets will go to the named beneficiaries. This is very useful if those beneficiaries aren’t yet old enough to be given the assets directly. It will therefore provide peace of mind to the settlor: that no one has the legal power to take the assets away after you’ve died.

Trusts also provide tax benefits. In some cases, placing money in trust can substantially reduce inheritance tax liability, compared with the amount that you’d have to pay if the money went through probate.

Trusts might also protect specific assets. For example, they can be used to prevent the family home from being sold in order to pay for a care home.

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