There are many positives to creating a trust. They can help you reduce your tax burden, protect your intended beneficiaries and avoid wills and probate disputes. However, there are many different types of trust; knowing the differences between them will help you establish which is right for your circumstances.
With a discretionary trust, the trustees have discretion over how to use the capital and income of the trust fund. While beneficiaries will be named in the trust deed, it is up to the trustees to decide which of the beneficiaries is to benefit.
A discretionary trust can be useful if you have a group of people that you know you wish to pass assets onto, but you don’t know which will need financial help in the future or what sort of help is required. For example, this could be your children.
Another bonus is that the assets within a discretionary trust are classed as being outside of the beneficiaries’ estates when it comes to Inheritance Tax. They’re also not counted when calculating means tested benefits.
Discretionary trusts are very flexible; you do lose control over exactly what happens to the assets you have placed within the trust. To counter this, you can appoint yourself as a trustee so you can have some influence over the decisions of the trustees.
These are also known as simple trusts. Essentially, the beneficiary gains the immediate and absolute right to the assets in the trust and any income they generate. Once the trust has been set up, the beneficiaries cannot be changed.
This type of trust is generally used for transferring assets to a minor – a trustee holds the assets on trust until the beneficiary is 18.
The beneficiary will be responsible for paying Income Tax and Capital Gains Tax on the assets within the trust. However, they are viewed as ‘potentially exempt transfers’ for Inheritance Tax. In other words, so long as the person who put the assets into the trust does not die within seven years of doing so, there will be no Inheritance Tax to pay.
Parental trusts for minors
This is where a ‘relevant child’ of the settlor (the person setting up the trust) can benefit from the assets in the trust.
The child’s income from the trust is classed as being the income of the settlor when it comes to Income Tax, while Capital Gains Tax must also be paid.
Interest in possession trusts
This is where the beneficiary of a trust is entitled to the income from the trust as it arises. The trustee is duty bound to pass on all of the income received to the beneficiary.
There are two types of beneficiary within a trust like this – the income beneficiary is the one who is entitled to the income from the trust for life. However, separate beneficiaries will be detailed in the trust, and they are entitled to the capital of the trust.
An example where you might put your investments into a trust like this – your spouse could be the income beneficiary, while your children are the capital beneficiaries.
Beneficiaries may be vulnerable for two main reasons – either they are mentally or physically disabled, or they are under the age of 18 and one of their parents have died.
These may qualify for special tax treatment.
Unsure whether you would like to set up a trust? At legalmatters we are happy to talk you through things. Feel free to call us today on 01243 216900 or email us at firstname.lastname@example.org.