A trust is a fund you contribute money, shares or property to and which will usually be paid out to a named beneficiary on the event of your death. Some trust funds give immediate access to the fund. Regardless of when the beneficiary has access to the contents, these are no longer yours.
Instead, the contents of the trust are held and looked after by a third party (the ‘trustee’ – usually a lawyer) who agrees to hand them over to your named beneficiary when the time comes.
The role of the trustee
The individual tasked with looking after the trust doesn’t just squirrel the money away and forget about it until the appointed time arrives to hand it over. Instead, he or she has a legal responsibility to ‘run’ the fund i.e. ensure it continues to make money by investing it well. To be able to achieve this, they have as much access to the funds as if it was their own savings.
There are, in essence, three people involved in a trust fund – the Trustor (who contributes the assets/cash in the first place), the Trustee (who holds the contents and manages it), and the beneficiary (i.e. the person who will eventually receive the contents of the trust).
The benefits of a trust
Putting your money into a trust fund for your children or other members of your family – maybe a friend – means that they won’t have to pay as much in inheritance tax. That’s because the money or assets are no longer deemed to belong to you (hence the reason your beneficiary won’t have to pay tax on them).
It allows you to defer payment to your offspring until you deem them responsible enough to handle the money. For instance, parents often name the individual/s who are to receive the money and at what age. A typical age for children to access money or assets is 21 years. Sometimes, there could be special stipulations i.e. when the beneficiary is ‘clean’ from drugs, alcohol or other stimulants which could make them behave recklessly with the money.
Types of trust available
- Bare trust. The beneficiary is given access to the funds when he/she turns 18 years of age. It could be that a partner is named as the beneficiary and when they die the money is passed on to offspring.
- Discretionary trust. You leave the decisions about how the money is to be spent to the trustee. A typical scenario would be to leave the money to grandchildren, but to allow the parents to decide how it is split.
- Vulnerable person trust. This is the type of trust frequently referred to in Charles Dicken’s books i.e. it’s when an orphan has money put in trust for them and which they don’t receive until they turn a certain age.
- Interest in possession trust. The beneficiary can have access to the money the trust accumulates (i.e. interest on savings) but not the actual trust fund. This is passed onto the children when that partner dies. Income tax is paid on those savings by the beneficiary.
The above list isn’t exhaustive since there are other type of trusts to choose from too. It just depends which suits your own particular circumstances.