What is a trust?
A trust is a legal relationship where assets and income are held by one party for the benefit of another. These assets can be money, investments, land, buildings etc.
The ‘settlor’ transfers some or all of their assets into the trust. These assets make up the ‘trust fund’. ‘Trustees’ are appointed to manage the trust fund. This includes distributing it to the ‘beneficiaries’, the people named as being allowed to benefit from the trust fund.
A trust separates an asset’s legal ownership (actual ownership in name) from its equitable ownership (the right to use the asset or receive any income it produces but not actual ownership). This may be done for tax reasons or to control the asset and its benefits if the settlor is absent, incapacitated or deceased. Trusts are often created in wills to define how an asset will be handled for children and other beneficiaries.
Trustees are given legal title to the assets in the trust fund but are obligated to act in accordance with the terms of the trust, which are usually in the best interests of the beneficiaries.
Trustees can be individuals or a trust company. A trust must have one to four trustees.
Why set up a trust?
- To control and protect family assets. You may wish to do this in your lifetime or after you die (a ‘will trust’)
- To ensure that your loved ones have financial stability for the future
- To benefit someone who does not have mental capacity. A trust can be used to benefit them without affecting financial assessments for means-tested benefits or care fees
- To control the distribution of monies to beneficiaries to ensure that they do not receive a large sum of money all at once. For this reason, trusts are popular with clients who are concerned that a beneficiary would waste or misuse the funds if they received it all in one distribution
- To pay for children or grandchildren’s education, whether that be school or university
- For tax reasons. If the trust is set up at least seven years before you die, the assets within the trust are likely to fall outside your estate for inheritance tax purposes. However, trusts still have to pay tax and many trusts must now be registered at HMRC’s Trust Registration Service.
Who do you appoint as a trustee?
You would normally appoint one to four trustees (you can appoint one but this can be problematic if they can’t act any more for some reason). The trustees need to be people who you trust implicitly and who have good judgment, as they are given legal title to the property in the trust. In addition, they are obliged to act in accordance with the terms of the trust and are required to act in the best interests of the beneficiaries. It is very important to choose the right people to be your trustees to ensure that trust assets are looked after properly and that trust monies are used wisely for the benefit of the beneficiaries.
I have heard that creating a ‘life interest trust’ in your will could help to minimise care home fees
Yes, this is possible. To do this, you need to own a property jointly with someone (e.g. your spouse / civil partner). You then need to include a clause in your wills for a life interest trust. For the trust to be effective, the property must be owned as tenants in common rather than joint tenants (if you are joint tenants, you can sever the joint tenancy to become tenants in common). The trust must specify who you leave your half of the property to (the ‘ultimate beneficiaries’) if you die first but must allow the surviving spouse / civil partner (the ‘life tenant’) to stay living in the property.
The trust is “activated” when the first spouse / civil partner dies. The surviving spouse / civil partner has the right to live in the property for the rest of their life. If they go into residential care, only their half of the property can be included in any financial assessment to see if they must pay their care fees (or if the local authority is liable to pay). This is because the deceased spouse / civil partner’s half of the property is held on trust for the ultimate beneficiaries, in effect, ringfencing it from being used up paying the survivor’s care fees.
Yes, this is possible. If the property is jointly owned by you and your spouse, it is essential that the property is held as tenants in common, rather than joint tenants. It is possible for you to leave your spouse a life interest in your half of the property and if your spouse goes into a care home after you die, only half the value of the house is taken into consideration by the local authority when carrying out a financial assessment to see if they had to pay for their own care. It is essential that the life interest trust is properly worded in the will and you should ensure that you consult a specialist solicitor.