Why Would I Set Up a Trust

The legal precedent for trusts was established during the time of the Crusades. When landowners went off to fight they passed responsibility for their land to a friend who took over its affairs. However, when the Crusader returned, in the eyes of the law they no longer had any right to their land. Cases such as these were often passed to the Lord Chancellor, who developed a pattern for dealing with them. This pattern came to develop into the principle of the trust, in which the right of the owner cannot be overridden by the ‘legal’ right of the person to whom they passed the asset.

Children

Trusts continue to be used in a similar way today. The most common situation in which an individual might choose to establish a trust is during the process of writing their will. It is often the case that an individual wishes to leave money to their children when they die, but that they only wish for them to be able to access it once they reach a certain ‘contingency age’, often either 18 or 21. In the intervening time between the death of the will writer and the point at which the child reaches the contingency age, a trust must be established in order to protect the assets to which the child is entitled. During this time, the trustee (who will have been appointed by the ‘settlor’, or trust creator) will be responsible for ensuring that the assets can be disbursed in the way in which the settlor intended.

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Inheritance Tax

Aside from the bequeathing of assets to a child, trusts serve a valuable purpose for both tax avoidance and asset protection. At the current time, the so-called Nil-Rate Band of Inheritance Tax is £325,000; Inheritance Tax must be paid at 40% on any estates of a greater value than this. In order to avoid the payment of this tax, many individuals choose to set up a discretionary trust. This involves the settlor giving up his or her legal right to the assets in trust, and therefore reducing the size of his or her own estate. In many cases a series of trusts can serve to bring the size of the estate below the Nil-Rate Band and, even if this is not possible, it can mitigate the individual’s tax liabilities to a great extent.

£325,000 may seem like a large figure, but when all of the assets which will be counted as part of the estate are considered, many people will find that they will be eligible for Inheritance Tax. Avoiding the tax in this way is perfectly legal, but seeking legal advice is always recommended.

The second major purpose for a trust is asset protection. Many individuals will find that they are unable to pay off all of their debts before their death; mortgage debt alone may be impossible to cover if the individual has no life insurance. If this is the case, but the individual still wishes to leave some assets to relatives or friends, they may choose to establish a trust in order to relinquish their legal right and therefore ensure that creditors cannot take the assets before they reach the beneficiaries. Again, although this course of action is perfectly legal, you should take independent advice before acting.

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