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What is a Trust?

A trust is created when a person ('the Settlor') gives assets to other people known as the "Trustees" to hold, not for their own benefit but for the benefit of others (the "Beneficiaries"). You can set up a trust in your lifetime or in your Will. In either case the Trustees then have to manage the assets on behalf of the Beneficiaries according to the terms of the Will or Trust Deed.

Trusts can be useful for a variety of purposes. There are several different types of trust that can be created:

Bare Trusts

A Bare Trust is the simplest type of trust. It is commonly used for Trustees to hold assets for a child until they reach 18. These are particularly useful if you wish to undertake some Inheritance Tax planning by giving away assets to children or grandchildren but you do not want them to have access to the assets until the age of 18.
Bare Trusts are also commonly used as the format for a Personal Injury Compensation Trust.

A Life Interest Trust gives a Beneficiary the right to income only.  Such a Beneficiary is known as the 'life tenant'. A Life Interest Trust is often used to ensure that the capital is preserved for intended beneficiaries after the death of the life tenant. A Life Interest Trust created in your Will for your spouse ensures that your estate is free of Inheritance Tax upon your death and that the capital passes to your intended Beneficiaries after your spouse's death. Life Interest Trusts are commonly used for capital protection in second marriages where a person wishes to ultimately benefit children from a previous relationship. If you wish, it is also possible to give the Trustees additional powers to be able to pass capital assets to the life tenant or any other specified Beneficiary to give more flexibility to provide for future changes in circumstances.

A form of these trusts can also be used where you wish to delay the age at which your child inherits, often to age 21 or 25, but wish to give some income to your child when they reach 18.

Life Interest Trusts can also be used if you wish to create a trust over the house that you live in, in order to preserve relief from Capital Gains Tax on the property (Principal Private Residence Relief).

Another common type of Trust is the Discretionary Trust. In a Discretionary Trust none of the Beneficiaries has a fixed right to any particular share of the Trust Fund. Instead, the Trustees have discretion as to whom among the Beneficiaries they want to benefit at a particular time and to what extent they should benefit.

Discretionary Trusts are particularly useful for protecting assets from third parties. They are often set up with one individual in mind. This is usually someone who is vulnerable in some way, possibly owing to disability, immaturity or a risk of divorce or bankruptcy.

Discretionary trusts can offer peace of mind. You can be sure that your loved ones will not suffer financially because of unfortunate relationships, lifestyles, disabilities, or being taken advantage of by others.

It is crucial that you choose the Trustees carefully. If you set up a trust in your lifetime, you can be one of the Trustees and you can control who is appointed as a Trustee in the future. Trustees must act unanimously and must act in the best interests of the Beneficiaries. Trustees can only act in accordance with the terms of the Trust Deed. You may choose lay Trustees or professional Trustees. You should choose people you are confident will carry out your wishes in the best interests of the Beneficiaries. As long as you can be sure of this, a trust offers you an ideal way to manage your family's future security, both during your lifetime and after your death.