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Whilst it is true that the Law of Trusts is often complex and certainly has a long history the basic concept is relatively straight forward. A Trust is an arrangement whereby the legal owner or owners of property (including actual land/property, company shares or other investments, and cash/bank accounts) own that property for the benefit of someone else.
For a Trust to exist there needs to be those 3 elements the legal owner (Trustee), the property (the subject of the Trust) and the people who benefit from that property (the Beneficiaries). Lawyers often talk, therefore, about legal ownership and beneficial ownership.
If a parent opens a bank account for a young child they are a Trustee of those funds for the benefit of the child. This is a good example of a “Bare Trust”. The Trustee’s name appears on the legal ownership (the name of the account) but the person who is entitled to the funds is the child (the Beneficiary). If the parent were to take the funds for him or herself this would be a breach of trust.
There are some Trusts where a Trustee owns the property in their name but if any income is earned by that property (rents, dividends, bank interest) that income must be paid in its entirety to the Beneficiary. This is referred to as a Life Interest Trust the Beneficiary whilst ever they are alive are identified as the person entitled to any income earned but usually they cannot receive any capital. Following the death of the Beneficiary the Trust comes to an end and pays out to others (often referred to in legal terms as the remainderman, i.e. the people who receive what’s left). The Trustees have a duty to look after the capital or the property to such a degree as to protect it for the benefit of both the lifetime Beneficiary and ultimately the remainderman. They do not have very much more authority. At the other end of the scale a Discretionary Trust is one where the Trustees own a property and they can choose who benefits from it, by how much, when and with such conditions as they may decide. They usually have to choose from a list of potential Beneficiaries established by the document creating the Trust but within that they have a great deal of freedom and discretion, hence the title.
Trusts are taxed in a variety of ways but in recent decades have become less attractive as a vehicle for saving tax. Trusts can be created by somebody who is alive (a Settlor) or they are created on death by means of a Will or arise where there is an intestacy (no Will) but there is a young child who would inherit. There are a variety of rules that apply as to how Trusts are taxed, depending on the circumstances and how they have been created.
Before 2008 it’s quite common in a Will to create a “Nil Rate Band Discretionary Trust” in order to benefit from as much inheritance tax free as possible between a married couple. Since this now happens automatically and a married couple will have twice the individual nil rate band these are less common and not really necessary. However, Property Life Interest Trusts are still a common method of protecting the assets of one spouse being used in the estate of the other to pay for the costs of care in later life.
Whilst Trusts may be useful for the extremely wealthy to enable them to protect some of their wealth for their descendants they are by no means the exclusive right of millionaires. In some ways every person who writes a Will creates a Trust since their Executors will need to administer their estate on behalf of the Beneficiaries who will receive the estate once it is wound up.
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