British trust law enjoys a long, fascinating history dating back to 18th -century Court of Chancery days, under the reign of King George I. Back then, trust and equity rules were established as a parallel justice system to address “inequity” of common law around property disputes (and to appease disgruntled claimants).

Initially, trust funds were mostly utilized for management of “will moneys” and to create family settlements. Today, “trust” has evolved into an umbrella term for a variety of financial frameworks that allow citizens to protect assets, distribute earnings and manage wealth both for the present day and for future generations. Although traditionally associated with millionaires and magnates, trusts can benefit middle-class families as well (see How To Set Up A Trust Fund If You're Not Rich).

What Is a Trust Fund?

In principle, a trust is a very simple concept. It’s a private legal arrangement in which the ownership of someone’s assets (which might include stock shares, cash, real estate or even artworks) is transferred to a private fund, and held or managed by an individual (or group of individuals) for the benefit of the trust members.  

The person providing the assets is generally referred to as the settlor. Those appointed to look after the assets are known as trustees, and those who receive disbursements from the trust are the beneficiaries. Once assigned to the trust, assets are no longer deemed personal possessions of the settlors, and are therefore safeguarded from creditors (even in cases of bankruptcy), financial setbacks, family disagreements and lawsuits. As such, trusts are a widely used ”safe haven” arrangement for family and business assets.

Why Create a Trust?

Trusts serve a variety of needs, and the reasons for establishing them are seemingly endless. The most common include:

  • To control and protect family assets (possibly the number-one motive)
  • Estate and inheritance planning
  • When someone is too young (or incapacitated) to handle his/her own financial affairs
  • To protect ”spendthrifts” against their own lack of control
  • For management and distribution of pension/retirement funds during the term of an individual’s employment

What Types of Trusts are There?

Since trusts function as multipurpose legal tools, they take many forms. The United Kingdom recognizes numerous trust arrangements (each with its own specific procedures and regulations) that generally fall into one of the following categories:

Bare Trusts: Also known as a “Simple Trust,” property or assets in this form are held in the name of a trustee who has no discretion over what income is paid to the beneficiary and has no active duties to perform. The beneficiary has absolute right to all of the capital and income of the trust at any time – if he or she is 18 or over (in England and Wales), or 16 and above (in Scotland). Bare trusts are often utilized as a vehicle through which assets are passed to young people. Trustees simply manage the assets until the beneficiary is old enough to handle that responsibility, which means assets set aside by the settlor will always go directly to the intended beneficiary. 

Interest in Possession Trusts: This structure provides an individual with a ”present right to the present enjoyment” of something, so the trustee must pass on all trust income to the beneficiary as it arises (less any expenses and tax). This type of trust can give the ”interest in possession” to a beneficiary for a fixed period; an indefinite period; or, most frequently, for the rest of the beneficiary's life. In the latter example, called a “life interest” trust, the interest in possession ends when the income beneficiary (known as the “life tenant”) dies.

Discretionary Trusts: As the name implies, this instrument provides the trustee with discretion over distributions from the trust. Discretion must be exercised in accordance with the terms of the trust deed; however, it is entirely up to the trustees to decide as to the timing, size and nature of the distributions, and even, in some cases, which of the potential beneficiaries is to benefit. The assets are said to be “held in trust” for the beneficiaries to one day decide what to do with those assets. A Discretionary Trust is a very flexible form of trust commonly used to keep wealth within families, while allowing them some flexibility to make decisions about where the assets go. 

Accumulation and Maintenance Trusts: This version allows the trustees to augment the trust’s capital and income. Trustees of an accumulation and maintenance trust are given power to “accumulate” the trust's assets (through savings and investments), until a certain date, at which time the beneficiary is entitled to the property of the trust or to some of the income arising from that property. When the beneficiary reaches the age of 18 (at least, but no older than 25), he or she becomes entitled to the full income generated by the trust.

Mixed Trusts: As the name suggests, this form contains different types of trusts within the one structure. Some assets may be set aside in an Interest in Possession Trust, while others may be treated in a Discretionary Trust manner. Mixed Trusts are often created to benefit sibling beneficiaries who reach inheritance age at different times.

How Do I Create a Trust?

While simple in theory, trusts can become a web of complexity if they're to operate properly. A solicitor is required to draw up a trust, and the legal wording must be precise. The process can be costly (around £1,000 or more), depending upon the extent of advice required. By being prepared before you start in the consultation process, however, you can considerably reduce professional advice time and associated costs, irrespective of trust type.

Step 1: Decide upon the assets

You will need to list the items and value of those items that have been allocated, or will otherwise be acquired, at trust inception.

Step 2: Appoint trustee(s)

Select an individual or management company you trust (banks are often used) because the trustee will bear significant legal authority with control over trust assets. (For more on making a decision, see Can You Trust Your Trustee?)

Step 3: Determine the beneficiaries

Compile a list of people or entities that will be entitled to receive benefits and include the percentage of those benefits to which each beneficiary is entitled.

Step 4: Outline the terms

A trust is generally created by way of a deed. A trust deed is a legal document prescribing the rules that govern your fund and the powers of the trustee. It includes the fund’s objectives; specifies original trust assets; identifies the beneficiaries; identifies how benefits are to be paid (either via lump sum or income stream); details how the trust may be settled (that is, terminated); and sets out the rules for operation of the trust bank account. Although the deed itself should be crafted by someone with adequate specialized legal, tax and financial knowledge, you should decide on all these aspects, and sketch them out for the professional preparer.

The Trust Deed will specify:

• The identities of the trustees and beneficiaries

• Which assets are being passed into the trust for management by the trustee

• How the money/property is to be managed

• The permitted use of the money

• Who receives the money/property when the trust is terminated

The Bottom Line

Given their practicality, flexibility and many financial benefits, trust funds have become an incredibly popular way of structuring financial affairs. However, the complex nature of many trusts requires a crystal-clear understanding of the legal relationships and obligations involved.

If you’d like to set up a trust, you can always start with your own solicitor, accountant and/or tax advisor. Law Societies also maintain searchable databases to help you find a qualified solicitor in your area:

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