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Trusts Guide

A Trust is normally created by Deed during lifetime or by Will. There are other ways in which a Trust can be created such as by the circumstances of a particular situation or by Statutory Law but this Guide is intended to cover only those Trusts created by Will or Deed.

A Trust could be defined as “an obligation in respect of assets or property placed under the control of a person or persons (the Trustees) for the benefit of persons (the Beneficiaries) or for a specific purpose either during lifetime or on death”. The Trustees have control of the assets or property (Legal Interest) but do so for the benefit of the beneficiaries (Equitable Interest). This responsibility is enforceable in law. Trustees can also be beneficiaries.

Under present UK Law a Trust cannot exist for longer than 125 years (the Perpetuity Period) unless it is for charitable purposes. The purpose of this is to ensure that assets are distributed to those entitled to them within a reasonable time and to ensure they are not held indefinitely. In addition there must be at least 2 but no more than 4 Trustees although it is permissible for only 1 Trustee to act where no real property (land or buildings) is held as trust assets otherwise only a Trust Corporation can act as a sole Trustee. Trustees must be 18 or over, have full mental capacity and must not be undischarged bankrupts.

There are 2 main types of Trust :-

  • Interest in possession (Life or Limited Interest) – this means that the various beneficiaries have an absolute right to receive income or capital at the times specified by the terms of the Trust and cannot be taken away.
  • Non–Interest in possession (Discretionary) – this means that none of the potential beneficiaries has an absolute right to either income or capital. A beneficiary can only receive income or capital by reason of the Trustees exercising their discretion in their favour. The Trustees, in exercising this discretion, will take into account the overall circumstances and may also take into account the wishes of the person who created the Trust (the Settlor) either by referring to them for guidance, if they are still living, or by referring to a Letter of Wish which may have been left to guide the Trustees.

There are various reasons why Trusts might be set up such as providing for young or handicapped beneficiaries in a way that ensures the capital is retained intact until some future time. Primarily, however, Trusts are created in order to reduce the effect of taxation particularly Inheritance Tax (IHT). It is very important therefore to consider all the taxation implications and to obtain professional advice before contemplating the creation of Trusts whether this is by Deed during lifetime or by Will to take effect on death. In the case of a Will it is also very important to keep pace with changing legislation to ensure that changes to the Will are made to reflect these or any other changes in circumstances such as marriage, divorce, birth of children etc. or any material financial change.

N.B. With effect from 22 March 2006 legislation has been introduced which changes a great deal of the law relating to the taxation of trusts. It is advisable that any trusts created by Will or Deed prior to this date be reviewed with a suitably qualified professional to review the tax repercussions and whether such trusts are still appropriate to the circumstances.

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