Trusts

What is a Trust?

A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts and they are taxed differently. Trusts involve the ‘settlor’, who is the person who puts assets into a trust, the ‘trustee’ who is the person who manages the trust and the ‘beneficiary’ who is the person who benefits from the trust.

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An Asset protection Trust is a lifetime trust which means it is established during a client’s lifetime, not on their death according to their Will. Lifetime trusts are used for protection of assets for various reasons, with the aim of ensuring these are passed to designated beneficiaries on death. There are a number of types of assets which can be placed into this trust. Typically, these are property (either the house you own or a share of a house you own) or capital from your personal ownership. There are certain restrictions on what you can and cannot place into the trust. This trust can be used for Capital Investment Bonds and Life Insurance contracts.

The Property Protection Trust (PPT) is a type of trust written in a Will that can help protect a share in a property.  Typically, when a couple own a property jointly and one partner dies, their share passes to the surviving partner/owner. This may seem the most practical and simple solution, but there are relevant reasons why this may not be the best thing to happen. The most common concern is “Second Marriage Syndrome”. This is where after one partner dies then the survivor may go on to form a new relationship and even re-marry which would either revoke the surviving partners existing will, or they could make a new will. This could result in any children from the first relationship being disinherited, as the new spouse, and any of their children, could inherit instead. Each partner of a couple may have different beneficiaries from each other such as children from a previous relationship, and want to ensure that they do inherit after death.

A Discretionary Trust is a trust which leaves the distribution of the trust property (either capital, income, or both) to the absolute discretion of the Trustees. When choosing to set up a Discretionary Trust within a Will the trust does not come into effect until the testator (the person who makes the will) dies; once the trust is set up the assets within it are held by the Trustees. This could be appropriate for couples who are not married for Inheritance Tax mitigation purposes. This is because the Transferable Nil Rate band (TNRB) is not applicable to such couples, whereas married couples or civil partners do have access to the TNRB.

The Flexible Life Interest Trust (FLIT) incorporates two separate Life Interest Trusts into a Will. The first Life Interest Trust concerns your main residence (much like the PPT) and the second trust captures the residue, minus chattels (wasting assets like furniture and personal possessions).  The trusts give a lifetime interest in the property and residue to a beneficiary of their choice, this beneficiary would be called the Life Tenant. Giving them a lifetime interest means that the Life Tenant will never own the assets that are held in trust absolutely, however they will be entitled to lifetime enjoyment of the property and other assets and any income which may arise (i.e. if they have rentals or income producing investments). When the Life Tenant no longer has a right to benefit from the assets due to their death or by termination of the trust, the property is subsequently passed to the beneficiary/ies (the ‘remainderman’ ) as described in the Will.