There are four key roles in the use of a trust. A trust is an obligation binding a person called a trustee to deal with property in a particular way for the benefit of one or more â€˜beneficiariesâ€™. The settlor creates the trust and puts property into it at the start, often adding more later. The settlor says in the trust deed how the trustâ€™s property and income should be used. Trustees are the â€˜legal ownersâ€™ of the trust property and must deal with it in the way set out in the trust deed. They also administer the trust. There can be one or more trustees. Finally, the beneficiary is anyone who benefits from the property held in the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlorâ€™s family.
A bare trust is the most common type of trust and is where the property is held in the trusteeâ€™s name but the beneficiary can take actual possession of both the income and trust property whenever they want. The beneficiaries are named and cannot be changed. You can gift assets to a child via a bare trust while you are alive, which will be treated as a Potentially Exempt Transfer (PET) until the child reaches age 18, (the age of majority in England and Wales), when the child can legally demand his or her share of the trust fund from the trustees.
These trusts are typically used to leave income arising from a trust to a second surviving spouse for the rest of their life. On their death, the trust property reverts to other beneficiaries, (known as the remaindermen), who are often the children from the first marriage. You can, for example, set up an interest in possession trust in your will. You might then leave the income from the trust property to your spouse for life and the trust property itself to your children when your spouse dies. With a life interest trust, the trustees often have a â€˜power of appointmentâ€™, which means they can appoint capital to the beneficiaries (who can be from within a widely defined class, such as the settlorâ€™s extended family) when they see fit.
Trusts are taxed as entities in their own right. The beneficiaries pay tax separately on income they receive from the trust at their usual tax rates, after allowances. How a particular type of trust is charged to tax will depend upon the nature of that trust and how it falls within the taxing legislation. For example, a charge to IHT may arise when putting property into some trusts, and on other chargeable occasions â€“ for instance, when further property is added to the trust, on distributions of capital from the trust or on the ten- yearly anniversary of the trust. Trusts are very complicated, and you may have to pay IHT and/or Capital Gains Tax when putting property into the trust. If you want to create a trust you should seek professional advice