Why should I set up a Trust?
Setting up a Trust has traditionally been seen as a strategy for the wealthy, but it is increasingly being recognised as something anyone with assets can benefit from. Trusts are more popular now than they have ever been, but when is the right time to use them? And what are the best reasons for setting up a Trust?
What is a Trust?
A Trust is a legally binding arrangement for the management of specified funds or other assets (such as property, stocks and shares or a business) on behalf of one or more beneficiaries. It is often set up as part of a making a Will, but a Trust is not dependent on a Will.
The assets in a Trust Fund are managed by two or more Trustees, appointed by you when you set up the Trust. Depending on the type of Trust, they may have wide discretion as to how to manage the assets and distribute the income, or they may be required to act in specified ways.
Similarly, a Trust may be set up to continue indefinitely or to end at a certain point, such as when the beneficiary comes of age. There are many choices available as to how a Trust will work, but what are the advantages of setting one up?
Protecting your children’s inheritance
If anything should happen to you before your children reach adulthood, they will be unable to access their inheritance until they reach eighteen. At this point, access to funds may be essential to make provision for their quality of life, education or a start for their careers.
Setting up a Trust with reliable Trustees to manage it can ensure they have access to the funds they need, while still protecting the capital or investments. Depending on what you want to achieve, you can establish it so that these are transferred to your heirs when they reach a certain age (not necessarily eighteen) or allow them to draw an ongoing income while the Trust continues for the benefit of the next generation.
Protection against creditors
As soon as assets are placed in a Trust, they are no longer the property of either the settlor (the person setting up the Trust) or the beneficiaries. This means that, if you have creditors attempting to get paid, everything in the Trust is exempt from consideration by a court order. This also applies if you are declared bankrupt.
This can allow you to undertake a higher-risk venture or occupation with more confidence. Even if you end up losing everything, you will still not be putting your children’s inheritance at risk.
Protection against property claims
Should you be married and go through a divorce or end a civil union, your partner may try to claim a large proportion of your assets. If you have placed a substantial amount of the assets in a Trust, such as your home, this will be protected for your children.
If your relationship continues to remain unchanged, the same may not be true of the Trust’s beneficiaries. If you opt for a Trust that continues after they reach the age of eighteen, anything that remains in it will be safe from property claims by partners, in the event of a relationship breakdown.
Protecting your heirs against themselves
Your heirs, whether they are your children or other relatives, may not be good at managing their financial affairs. This could be particularly true if they inherit your estate at a young age and may not be sensible in managing the assets. On the other hand, you may be aware that a sibling you intend to leave money to cannot be trusted to manage it responsibly — for example, they may have a gambling habit.
Putting the funds or other assets in Trust, instead of willing it directly, means that the capital will be protected in the long term. You have the option of instructing the Trustees to pay the beneficiaries a regular income or giving them discretion to decide what needs to be provided. In that way, even if the beneficiary chooses to squander a given payment, they will not be left destitute.
Protection for relatives who are unable to manage their affairs
If you are intending to leave an inheritance to children or other relatives who are unable to manage their own affairs, setting up a Trust can be a perfect solution. This may apply, for example, if the person concerned has special needs, is infirm or has long-term mental health issues.
Without a Trust, other family members may try to get control of the inheritance, and there is no guarantee that they will administer it in the interests of your heir. Setting up a Trust with the role of the Trustees formalised can ensure this. You can even set the Trust to start paying out, either regularly or as required, before your death. In this case, you could be one of the Trustees, although this role will be separate from your role as settlor.
Succession planning for a family business
Passing on a family business to the next generation can be tricky, unless there is one natural heir to whom you confidently leave it. It has been calculated that only 30% of family businesses prosper in the second generation, while that figure is down to 3% by the fourth generation.
A Trust can ensure that the business is administered expertly on behalf of your heirs, rather than leaving them to get on with it. It can also avoid family disputes over the issue, which can be catastrophic both for the business and for family relations.
Do you need a Trust?
These are just a few of the most common reasons why setting up a Trust can be the best way to go.
Our specialist Trusts team in Leighton Buzzard can advise on the creation of Trusts, as well as all aspects of Trust administration, including making a Will, Inheritance Tax Planning, Advance Medical Decisions (Living Wills), Trust Creation & Administration and Property Trusts.
We will discuss your situation with you in order to establish whether a Trust would be advisable and, if so, what kind of Trust would best suit your needs.
To get in touch with our specialist Trusts team, please call 01525 378177 or contact us online.