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.
the ‘settlor’ - the person who puts assets into a trust
the ‘trustee’ - the person who manages the trust
the ‘beneficiary’ - the person who benefits from the trust
What trusts are for?
Trusts are set up for a number of reasons, including:
to control and protect family assets
when someone’s too young to handle their affairs
when someone cannot handle their affairs because they’re incapacitated
to pass on assets while you’re still alive
to pass on assets when you die (a ‘will trust’)
under the rules of inheritance if someone dies without a will (in England and Wales)
Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.
Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.
These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital.
Depending on the trust deed, trustees can decide:
what gets paid out (income or capital)
which beneficiary to make payments to
how often payments are made
any conditions to impose on the beneficiaries
Discretionary trusts are sometimes set up to put assets aside for:
a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life
beneficiaries who are not capable or responsible enough to deal with money themselves
These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.
A Charitable trust can be created either during your lifetime or upon your death. Such trusts are established specifically for a charitable purpose that is for public benefit. These attract a favourable tax treatment from HMRC.
Interest in possession trusts
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.
These are where the settlor or their spouse or civil partner benefits from the trust. The trust could be:
an interest in possession trust
an accumulation trust
a discretionary trust
A secret trust can be created to keep the identity of the ultimate beneficiary outside the will as the will becomes a public document upon someone's death.
Setting up a Trust Fund
To set up a trust, it needs to be validly declared and three certainties must be established
Certainty of words and intention. This basically means that you clearly intend to create the trust
Certainty of subject matter; that you specifically define the trust property
Certainty of objects. The beneficiaries of a trust must be certain, otherwise a trust will be void if the ‘objects’ of that trust (meaning, the ‘beneficiaries’ of that trust) are uncertain.