A trust is a legal entity set up by an individual - known as the settlor - to allow beneficiaries to benefit from funds without being the funds’ legal owner. A trustee is chosen to manage the trust on behalf of the beneficiaries. A trust allows funds to continue to be protected should a settlor become unable to manage their own affairs and even beyond a settlor’s death.
If you are considering creating a family trust, it can feel like a daunting task. The options available can seem overwhelming in terms of understanding what benefits a family trust provides, what you should - and shouldn’t - put in the trust, deciding who should be your beneficiaries, and choosing your trustees.
Trusts can be complicated structures with complex tax implications, so it’s important to seek expert advice if you’re considering setting one up.
How does a trust work?
You start by gifting funds that you no longer need access to into the care of your trustees. These funds are held specifically for the benefit of your selected beneficiaries, often your children, grandchildren and future generations, and the trustees are responsible for ensuring that the funds are invested and paid out to them in the manner dictated by the trust arrangements.
The trustees will be steered by the letter of wishes you leave to them, which provides guidance to them on your overall goals and desires for the funds, as well as the circumstances of the beneficiaries over the term of the trust fund. They can then use their discretion to provide assistance at sensible times.
For example, when the time comes for the purchase of a first car or deposit on a first home, your family trust will be there to assist and provide the support your loved ones need at crucial times.
By gifting your surplus funds into trust, after seven years they are no longer part of your estate for inheritance tax purposes when you pass away. Additionally, as your trustees have discretion over when the trust is accessed and for what purpose, there is an added layer of protection which does not apply when you make outright gifts during your lifetime or gifts through your Will.
So how do I create a family trust?
A trust is created by a legal document called a trust deed. This sets out the terms on which your selected Trustees must act and provides the basis on which they can use the funds for your beneficiaries in the future.
Before creating a family trust, you should carefully consider the terms of the trust deed, choose your trustees, and decide which assets you can afford to gift into it.
