Trusts can be created for a number of reasons, some are basic in their format whilst others can be created to provide for more complex situations.
You can create a Trust to take effect in life or you can provide for one to be created on your death within your Will.
The Trust Deed will identify the trust property and the beneficiaries. The Trust Deed will also appoint the persons responsible for managing and distributing the trust property, these people are known as the Trustees.
You may wish the Trust to provide for just one beneficiary or you can choose to provide for a class of beneficiary, for example ‘all my sisters and brothers’.
Within the Trust you can set out how you would like your Trustees distribute the trust property, alternatively you can give your Trustees a discretion (a choice) as to how the trust property should be distributed between the beneficiaries, this type of Trust is known as a Discretionary Trust.
Trusts can be used to deal with the following issues:
- The Family Home
- Life Assurance
- Life Settlements
- Protecting assets for the disabled and vulnerable
- Care Home fees
- Mitigating Inheritance Tax
Trusts and Long Term Care Costs
Trusts can sometimes help to ring-fence assets from assessment by a Local Authority should you need to enter long term/permanent residential or nursing care in the future.
If you did need long term care in the future you may qualify to receive Government funding to meet the costs of that care, if you are not eligible then you will be expected to meet the costs from your income and capital. Care costs can be expensive and capital can be exhausted quite quickly.
Once assets are gifted into Trust they are no longer within your legal ownership and therefore no longer fall to be classed as part of your Estate. However there are factors which you should consider before you decide to gift assets into Trust, one of these factors is the Charging Regulations of a Local Authority.
A Local Authority could infer that a gift was a deliberate act of deprivation by you in order to put the assets out of the reach of a Local Authority. If a Local Authority can establish deliberate deprivation then they could treat you as still owning the assets and deny funding. To determine deliberate deprivation a Local Authority will look at your circumstances at the time you made the gift into trust, and in particular the forseeability that you would need care in the future, the time at which a gift is made therefore can be crucial to a Local Authority’s decision.
Trusts can be used to receive either a pension lump sum on your death or the proceeds of a life assurance policy on your death. The Trust is created in life but only receives the trust assets, in other words the lump sum pension payment or life policy proceeds, on death, this Trust is known as Spousal Bypass Trust. Most pension schemes and some life policies do not form part of your Estate on death as they are held by the Trustees of the Scheme. Trustees of pensions and life assurance schemes have a choice as to who they pay the benefits to on the death of the scheme member. It is very important therefore that you leave instruction for the Trustees of the pension scheme to pay the pension benefits into the Spousal Bypass Trust. The Trustees of the Spousal Bypass Trust will hold the proceeds for the named Beneficiaries of that Trust.
A Spousal Bypass Trust is a good way of preventing assets from passing directly to a surviving spouse and forming part of his or her estate and then being vulnerable to fund care home fees in the future. The Spousal Bypass Trust can provide for your spouse to benefit from the pension or life policy funds without actually owning them.
For more information on Spousal Bypass Trusts please contact us at Frodshams.
Trusts for the Disabled and Vulnerable
If your beneficiary is disabled or vulnerable in any way that means that he or she is unable to manage their own affairs then you may wish to consider alternative options to giving assets directly to them.
A Trust can be created to provide for your loved one to benefit from the assets while not being burdened with the management of it. The Trustees of the Trust can decide how the Trust Property is distributed to your beneficiary, you can set out specific instructions as to how the beneficiary is to be treated. The Trustees must always work in the best interests of the Trust beneficiary.
The way in which a Trust operates can mean that someone can benefit without losing their rights to welfare benefits. The Trust must be carefully drafted to ensure it meets your wishes and the beneficiary’s needs.
There will be tax implications on Trusts although this is a very complex and the tax consequences will depend on the type of Trust.
Any gifts in life will be considered when calculating the value of your Estate for Inheritance Tax purposes.
A disabled person’s Trust however is exempt for Inheritance Tax purposes.
Income Tax and Capital Gains Tax apply to Trusts, again the implications will depend on the type of Trust.
The definition of a disabled person for the purposes of Inheritance Tax is found within the Inheritance Tax Act.
The Roles and Duties of a Trustee
Before accepting an appointment as a Trustee you should ensure you are fully aware of the responsibility and obligations that you will assume in this position. Some of the most basic and obvious duties of a Trustee are as follows
- You should ensure that there is no conflict between you as a Trustee and the Beneficiary of the Trust.
- You should ensure that you understand the Trust document.
- You should ensure that the Trust property is vested in you as the Trustee.
- If you are appointed as a Trustee to an existing Trust you should check to make sure there has not been any breach of trust by the previous Trustees.
- You should ensure the beneficial interest of the Trust has not been charged or assigned.
- You should ensure that all Beneficiaries are fairly treated
- You must comply with the terms of the Trust
- You must keep accurate records and accounts.
- You must provide information and accounts.
- You must take reasonable care.
- You must act jointly with the other Trustees
- If you are a lay Trustee you are not entitled to be paid for your position as a Trustee whereas professional Trustees can charge under the Trustee Act 2000.
- You personally must not make any profit from the Trust.
- You personally are not entitled to purchase the Trust property.
- You must ensure that the assets are distributed to the correct Beneficiaries and if the Trust property is land you may have to consult the Beneficiaries before dealing with it.
A Trust can be complex in nature and you should seek legal advice to ensure you understand and fully comply with your duties as a Trustee.