What is a trust?

A trust is a method of managing assets. They can be used in many ways – from estate planning, minimising tax payments, to ensuring you have a pot of money set aside to pay for school fees.

Putting assets into a trust allows them to exist separately from their original owner. But why would anyone ‘give away’ control of their assets in this way?

Why use a trust?

There are nearly as many different types of trust as these are ways of using them. It all depends on what you want to achieve. Here are a few popular examples:

• To provide for vulnerable beneficiaries – A trust can be used to support young or handicapped beneficiaries. Control can be passed to the beneficiary once they are deemed capable of managing these assets – for example, when they reach adulthood.
• To ensure that your wishes are carried out – Rather than gifting assets, trusts can ensure that funds are used as you intended by using trustees who manage the assets (the people responsible for manging the trust). Trusts can also be used for privacy – if they are set up in the trustor’s lifetime, they do not need to be included in a Will.
• To pass on control of assets while the settlor is still alive – Assets can be put aside for the settlor’s benefit, e.g. to pay for care fees in later life.
• To protect assets – certain types of trusts can minimise tax payments or protect assets from creditors – or even certain family members.
• Avoid probate – it can take time for the settlor’s estate to be distributed to their beneficiaries when they die. A trust can ensure that there are funds available more quickly.

How do trusts work?

A settlor decides which of their assets (not just funds, but property, investments, business interests, artwork and life insurance policies too) to place in a trust, and how they wish the trust to be used. Once the trust is created, control of the assets passes to the trustees. The trustees will then manage the trust, paying any tax due, and deciding how the assets should be invested on behalf of or distributed to the beneficiaries.

It is very important that the settlor’s wishes are set out carefully, making their intentions clear because in many cases, a trust cannot be revoked – or is expensive to do so. While the terms of a trust can be strict, they also need to be flexible enough to allow trustees to respond to changing circumstances which may not have been foreseen.