Trust funds, also referred to simply as trusts, are often seen as symbols of extreme wealth. They do however serve a purpose that can be beneficial to a wide variety of individuals.
They help to ensure the responsible management of assets, especially in the case that the beneficiaries are deemed to be too young, irresponsible or of unsound mind to look after the assets themselves.
There are seven main variations on trust funds, each suitable for different nuanced scenarios. Here, we take a general overview of how trust funds work in the UK, with an outline of what you need to know when getting the process underway.
Parties in a trust
There are three main parties relevant to trust funds:
The settlor is the person who provides the assets controlled by the trust. They will be the one who decides how the trust is set up and structured, working with a solicitor to develop the legal part of the trust called the ‘trust deed’.
While a settlor will generally set up a trust for other individuals, it’s also possible for settlors to set a trust up for their own benefit, generally for tax reasons. In these cases, it’s called a ‘settlor-interested’ trust.
The trustees are those who legally own the trust fund. The trust must not be used for their own benefit; they can either hold it or use the trust for the beneficiaries. Trustees must be over 18 and of sound mind.
The beneficiaries of a trust are those who receive the assets, in a way that is controlled and managed by the trust itself. The beneficiaries of a trust can be anyone – they are often someone’s children, grandchildren, or other dependents.
Setting up a trust fund
Trust funds are backed up by complex, legally binding documents. Generally, they will need to be written up by a solicitor; the wording needs to be incredibly precise so as to not be ambiguous should the settlor one day not be around to confirm any points contained in the trust deed. It should be a self-contained document with nothing left to chance.
Benefits of trust funds
There are two main benefits to trust funds. First, it gives the settlor a certain degree of certainty that the assets they give to someone will be used in a responsible manner.
This could mean that a certain amount is paid out each month, with bigger sums paid out for things like university or medical emergencies. These are just examples of possibilities – you can arrange the rules of the trust as you see fit when you set it up.
The other significant benefit is that it can significantly decrease taxes. When you place something in a trust, it ceases to be yours. This means that when the settlor passes away, the assets in the trust are no longer in their estate and can’t be subject to inheritance tax.
Regardless of how you choose to proceed, it’s always best to liaise with the appropriate legal specialists who can ensure that you have all bases covered when it comes to setting up, and benefiting from, a trust fund.