A trust is an arrangement by which property is handed over to trustees to be applied for the benefit of other people, known as beneficiaries. It describes a relationship between the person who sets up the trust, the trustees who are entrusted to manage and administer the assets comprising the trust fund, and the beneficiaries for whom the assets are being held and administered. A trust is a very flexible way of separating the control and long term preservation and devolution of capital from its immediate enjoyment.
A trustee is a person who, usually alongside up to 3 others, is responsible for the proper running of a trust. It is generally advisable to appoint more than two individuals as trustees.
It is also possible to appoint a “trust corporation” as act as a trustee.
If a trust is created in terms of your will, it is usual for your executors to also be appointed as your trustees. If you are appointing guardians for your children, it may be appropriate that the guardians are also trustees in respect of any trusts for minor children.
Trustees have a legal duty to manage a trust for the benefit and in the best interests of the beneficiaries in a prudent and sensible way. Although it is possible, when necessary and if permitted by a trust deed or general law to employ people to help the trustees, a trustee ultimately is personally liable to the beneficiaries for the proper administration of the trust.
This type of trust usually exists where someone holds assets as a nominee for someone else. The beneficiary under this type of trust has an absolute right to the capital and income. The trustee has no discretion over the assets, provided the beneficiary is not a minor or incapable of managing his or her affairs.
Life interest trust
This is more formally referred to as an “interest in possession” trust. This kind of trust entitles a particular beneficiary called the “life tenant” to receive the income of the trust during his or her lifetime until death. It is useful in circumstances where the person setting up the trust wishes his or her spouse to receive income for life, and after death the trust fund is held for or passes to the children or other family.
Prior to 22 March 2006, such trusts could be created either during the lifetime of the person setting up the trust, as well as after death by his or her will.
Following that date, trusts created during one’s lifetime are treated in the same manner as a “discretionary trust” (see below) and the gift into trust carries a lifetime charge to inheritance tax of 20%. Such trusts can no longer effectively be created during one’s lifetime.
Since 22 March 2006, a beneficiary entitled to receive the income of the trust created by will of a deceased person for his or her lifetime, receives what is now referred to as a “post-death immediate interest” (IPDI).
Discretionary trusts are trusts in which the trust deed allows the trustees discretion to make decisions regarding which beneficiaries out of the named beneficiaries can benefit from income or capital, when and how often they may benefit from the trust income, and possibly also from the capital of the trust fund. Also, upon the winding up of the trust, the trustees have discretion as to how the accumulated income and the capital is finally distributed amongst one or more or all of the beneficiaries.
Discretionary trusts are sometimes set up to put assets for the future needs of spouses, children, grandchildren, or to support beneficiaries who for various are incapable of managing money by themselves.
From 22 March 2006, any trust that is not an IPDI (see above), nor certain other trusts for disabled persons and for bereaved minors, is therefore a “relevant property” trust.
Relevant property trusts include discretionary trusts. Unlike an IPDI, where the beneficiary has a “vested right” to receive the income of the will trust, a beneficiary of a discretionary trust has a “hope” that the trustees might appoint the trust income or capital in his or her favour.
A variation of a discretionary trust, namely an “accumulation and maintenance trust” (A&M trust) could be established prior to 22 March 2006 in which the trustees usually had the discretion to decide whether the income from the trust is to be accumulated or applied for the benefit of the beneficiaries or actually distributed to them if they attain a certain age over 18.
Since 6 April 2008, following a transition period during which such trusts could be restructured, any new A&M trusts and additions to existing A&M trusts are treated in the same way as discretionary trusts unless the assets pass to the beneficiary absolutely at the age of 18 or at age 25 for a disabled person (which, as explained above, are exceptions to the “relevant property rules”).
With an accumulation and maintenance trust, the trustees now have no discretion about who benefits from a share of the income and capital. The share of each beneficiary must be determined according to the original trust deed. The only discretion is whether or not to pay out income to a beneficiary. If the income is paid out to one beneficiary and not to another, then records have to be kept, showing each beneficiary’s remaining share.
One of the ways in which a trust could have been restructured during the transition period from from 22 March 2006 to 5th April 2008 was to create an “age 18 to 25 trust”. This is a discretionary trust created under the will or intestacy of a deceased parent or step-parent where the property in the trust is held for the benefit of a person aged over 18 and under 25 and each beneficiary will become absolutely entitled to the whole of the property on or before his or her 25th birthday.
In all other circumstances the termination of the life interest will be a chargeable transfer with the potential for IHT at 20% depending on allowable reliefs and the extent to which the person whose life interest has ended has utilised his or her nil-rate band within the past seven years. The rate of inheritance tax due will increase if the life tenant does not survive the termination of the life interest by 5 years.
Other kinds of “special” trusts
Certain kinds of trusts are variations of discretionary trusts, but the settled property is not relevant property, and they fall outside the inheritance tax regime for charging discretionary trusts.
These include a number of trusts related to employee benefits and pensions, those for disabled persons, and those for charitable or certain philanthropic purposes.