Trusts in the 21st century: are they still relevant?

Trusts in 2020: why they are perhaps more relevant than ever

Although most people know what a Will is and why we should make one, many of us are unfamiliar with the concept of a trust for lifetime and wealth planning. Others may have had personal experience of trusts some years ago and found them inflexible and unnecessarily complicated.

What is a trust?

A trust can often be best described by metaphor. Think of the legal ownership of an asset being transferred into a ‘bubble.’ Once you (the settlor) have transferred an asset into the ‘bubble’ it no longer belongs to you. You will appoint persons (trustees) who will manage the ‘bubble’ (and the assets within) on behalf of and for the benefit of the persons specified in the document creating the trust (the beneficiaries).

Trusts can be created by a deed during a settlor’s lifetime or by Will, where the trust would only come into being upon death.

What is the purpose of a trust?

Most professionally drafted modern trusts are designed to be flexible and to accommodate the changing needs of their beneficiaries. As such, trusts remain a very important tool in the modern lawyer’s toolbox and serve a number of important purposes in today’s complicated world. Here are some of them:

• Beneficiary protection: This is one of the major purposes behind trusts today. They are a very effective method of protecting a beneficiary from their own actions, which might be foolhardy due to immaturity or personal problems. For example, many older people might wish to alleviate the inheritance tax (IHT) payable on their estates on death by giving away assets to their children or grandchildren during their lifetime. However, if the beneficiaries are aged under 18 it would be a brave parent who gave a sum of any substance to a child to receive outright at the age of 18. A trust, by comparison, allows the gift to be made for IHT purposes but ensures that the child’s entitlement to the asset can be postponed to when they are older.
• Asset protection: Similarly, trusts are often used to try to protect the assets in them from claims arising from third parties such as creditors or former spouses. They may also be created to try to maximise the amount of financial assistance a person receives from their local authority with care fees in old age. When giving assets to the next generation, a trust will not only protect the beneficiary from their own actions but may also safeguard the assets if that beneficiary later goes through a divorce or gets into financial difficulties.
• Assisting disabled beneficiaries: If a disabled person is unable to handle money easily, or if receipt of a capital sum would affect their entitlement to benefits, then a trust can ensure that others manage the money on their behalf and their financial situation remains unaffected. If compensation or a damages award is received as a result of an accident or a negligence claim then a Personal Injury trust can ensure that the capital in the trust is disregarded for the purpose of ongoing welfare benefits and financial help towards long-term care fees.
• Saving tax: Trusts can be used in a number of ways to reduce tax liabilities. For example, trusts can be created in a Will to benefit the next generation, which have the advantage that the assets in them will not form part of your children’s estates and so suffer IHT again when passing to grandchildren (double taxation). Similarly, someone of working age potentially in receipt of a large Death in Service benefit can set up a trust to nominate this into trust so that the money can still be used to benefit his or her family, but does not aggregate with the surviving partner’s estate and therefore be subject to IHT on their death.
• Family Protection: Discretionary Will trusts and Flexible Life Interest trusts (also known as Immediate Post Death Interest trusts) can be of help in several ways including ensuring that the maximum IHT is saved when one party to a marriage or civil partnership has been married previously and widowed. Protecting assets for your children from a previous relationship to ultimately benefit from whilst ensuring your new partner still has somewhere to live and or an income stream for a time or their lifetime.

All in all, trusts can be of benefit in a number of situations, and in some ways are more necessary in these complicated times than ever before. Modern trusts are flexible and can often be the best way to protect your assets.

For more information on setting up a trust or using a trust in any of these situations, please contact us on 0800 652 8025 or get in touch online.