Why Might a Trust be Used?
Trusts are multi-purpose legal instruments. There are a significant number of different types of trust, each of which might be suitable for use in a different set of circumstances. As trusts are such a flexible tool, the reasons for establishing one are almost endless. However, some of the most common reasons are outlined below.
Inheritance PlanningProbably the most common reason for the establishment of a trust concerns estate and inheritance planning. Inheritance Tax (IHT) is a significant concern for an increasing number of individuals.
As house prices have continued to rise, many more people are finding that their estates will be liable for the tax after their death. This can have a significant impact on the livelihood of any dependants. In order to combat this, many people make provision for the establishment of a trust in their will. These 'nil-rate band discretionary trusts' are used as a form of legal tax avoidance to ensure that the maximum financial benefit is received by the deceased individual's dependants.
It should also be remembered that a will is, in itself, a basic form of trust as it appoints a third party to administer the property of the will maker. Further information on trusts and IHT planning is available elsewhere on this site.
Trusts can also be useful for placing conditions upon the transfer of property to another party. Recently, for example, a successful businessman gave his daughter £20 million as a birthday gift. This gift was contingent, however, on the daughter finishing her A Levels. This could have been achieved legally using a trust; the property could have been transferred to a trust, and the trustee would have been obliged to then transfer them to the daughter only upon the fulfilment of the criteria set by the settlor (the individual who established the trust).
SpendthriftsAnother relatively common use for a trust is to protect an individual against their own lack of control over their spending. 'Spending addictions' are not uncommon, but their effects can be mitigated through the effective use of a trust. Under such an arrangement the individual in question would create an inter vivos trust, also known as a living trust.
They would transfer a certain proportion of their assets into the ownership of the trust, and appoint a trustee. This is most likely to be a trusted friend or family member, but some organisations offer trustee services of this kind. The circumstances in which funds can be transferred back to the settlor would be established in writing, ensuring that the individual had access to money only when they really needed it.
Pension PlansFinally, pension plans are also frequently a type of trust. Within this arrangement the employer establishes the trust, and transfers assets to it at a predetermined rate. The employer will appoint a trustee, normally a corporate pension provider, who will then be responsible for disbursing the funds that have accumulated to the employee, who is also the beneficiary. The assets will only be transferred to the legal ownership of the beneficiary upon fulfilment of certain conditions, normally the completion of a term of employment.
Further information on uses of trusts, and the different types of trust that might be used in certain situations, is available elsewhere on this site.