How do I set up a Trust for my children?
If you are a parent or grandparent and you are considering leaving your assets to children after you die, then you will
want to draw up a Trust to secure inheritance and for peace of mind.
There are many other reasons why you may wish to set up a Trust and we explore these further in this article.
What is a Trust?
A Trust is a legal arrangement for transferring your assets into a private fund. This can be money, but it can also be stocks and shares, property, or items such as antiques or artwork. The fund is managed by at least two people or a group, known as trustees, on behalf of the beneficiaries- those intended to benefit from the assets.
Why set up a Trust for my children?
There are many reasons to set up a Trust for your children. For instance, if your child is severely disabled, or else for some reason is unlikely ever to be able to manage their own financial affairs, a Trust may be the best way of ensuring they have a lifelong income and help offer protection if they are vulnerable.
On the other hand, perhaps the most common reason to set up a Trust is to protect your children’s inheritance if they are still minors when you die. This allows them to have an income for their needs while still children and then receive the capital at a point of your choosing. This can be later than the legal age of majority, since you might feel an eighteen-year-old would not be ready for the inheritance.
A Trust can also be useful to cut the amount of inheritance tax payable. Although changes to the law have somewhat reduced this benefit, good professional advice can still enable you to lessen the tax burden. Money in Trust can also be protected in the event of a bankruptcy or divorce settlement.
There are four types of Trust that exist for children. In addition, some complex cases may involve a Trust that has aspects of two or more types.
A Bare Trust is the most common type of Trust. In this case, the whole sum in the fund belongs to the beneficiary and can be claimed when he or she reaches the age of eighteen (or sixteen in Scotland).
In this case, the trustees’ only duty is to manage the contents of the fund and hand over both capital and income as and when a beneficiary of legal age requests it. Trustees have no discretion about what happens to the funds.
Interest in Possession Trusts
In the case of an Interest in Possession Trust, one or more beneficiaries have the right to enjoy the income from the fund, divided up as specified by the settlor, but they do not own the capital. That remains in the fund, managed by the trustees.
A beneficiary of an Interest in Possession Trust may have the right to receive the income for a fixed term or for life. This approach is often used when the settlor wishes to create a lasting legacy, so that the benefits of the Trust can pass on, for example, to first the children and then the grandchildren.
For a Discretionary Trust, the trustees have a broad range of discretion on how to manage the fund. While this may be limited to some extent by the terms of the original deed, as drawn up by the settlor, the trustees have the right to interpret these.
This means that the trustees will decide when to distribute any payments, how much to pay out and which beneficiary should receive them, if there is more than one. There is usually a letter of wishes giving more detailed guidance to the trustees on how the settlor would want the distributions to be dealt with. This type of Trust is often used to safeguard wealth within the family, while still allowing a flexible response to developments.
Accumulation and Maintenance Trusts
Whereas the income generated by most Trusts is distributed to the beneficiaries, if an Accumulation and Maintenance Trust has been set up, income can at the trustees’ discretion be reinvested to increase the capital.
At a point specified in the deed (usually when the beneficiary is eighteen, though it can be deferred up to twenty-five), either the income or the whole fund becomes the property of the beneficiaries and must be paid as appropriate.
Who can be a trustee?
You can appoint any adult as a trustee, providing they agree to take on the role. This is a position of great responsibility, managing substantial amounts of money of assets on your behalf and that of the beneficiaries, so it should be someone you can rely on.
It is most common to appoint close family members as trustees. For example, if you are setting up a Trust for your children, you may choose your brother or sister. This has the advantage that the trustee should understand and care about the needs of the beneficiary. However, it would also be acceptable to appoint a professional company, such as a solicitors’ practice or a bank, in order to take advantage of their expertise.
You would be advised to appoint at least two trustees, although for complex Trusts up to four may be appropriate. If necessary, these could be a mixture of family members and professionals.
How do I set up a Trust?
A Trust Fund may be set up as part of the process of making your will, and your solicitor will guide you through this. On the other hand, it can also be a completely separate process. This may be appropriate, for instance, if you want the Trust to start immediately, in order to protect your children’s inheritance or reduce the tax burden.
Choosing the right type of Trust from among the many available requires expert professional advice. Before your appointment with your solicitor, it would be beneficial to have the following information to hand:
- A complete list of the assets to be assigned or acquired for the Trust Fund, along with the value of each.
- The trustees you wish to appoint, having established that each is willing to be appointed.
- Who the beneficiaries are to be, and also any future beneficiaries such as grandchildren
- What terms you want written into the Trust Deed — for instance, the rules that govern your fund and the powers of each trustee, how benefits are to be paid and how the Trust may be ended. The solicitor will help you with the details, but you need to have your intentions clear.
The solicitor will then help you draw up the Trust Deed, which is the legal document establishing the Trust. The Trust Fund will then be either set up immediately, allowing you to transfer your assets, or it will be established after you die, as part of executing your will.
We can help you
At Osborne Morris & Morgan we are specialists in setting up and managing Wills and Trusts. We take the time to get to know you and your affairs and treat every case with great sensitivity and care.
For further information or advice on the subject from our Wills and Trusts specialists, please contact us either by calling us on 01525 378177 or via online to discuss your requirements.