What is a trust and what are the common misconceptions?
In simple terms, a Trust is a financial arrangement made between three parties:
- Settlor – the person who puts assets into a Trust;
- Trustee – the person who manages and administers the Trust; and
- Beneficiary – the person who benefits from the Trust.
Effectively, this means that the Settlor will transfer his/her ownership of the assets to the Trust and the Trustee will manage those assets for the benefit of the Beneficiary as directed by the terms of the Trust.
Trusts can be set up for a number of reasons, including:
- to pass assets when you die;
- to pass assets while you are still alive;
- to control and protect family assets;
- when someone is too young to manage their affairs; or
- when someone cannot manage their affairs because they are incapacitated.
Common misconceptions about Trusts
Misconception #1: Trusts are only for the ultra-wealthy.
Many people will have come across a form of Trust in their lifetime without realising it. Trusts are a way of managing assets, i.e. money, investments, land or buildings. For example, if you have children under the age of 18, placing your assets into a Trust would ensure that those assets are held for your children if you die before they reach the age of 18. Income and/or capital from the Trust could be paid to your children’s guardians to help cover the costs of raising your children.
Misconception #2: I don’t need a Trust if I have a Will.
Incorrect. Wills and Trusts are not an either-or; they serve different purposes. The purpose of a Will is to make an outright distribution of your assets in the event that you die. In contrast, the purpose of a Trust is to distribute your assets over time and ensure that any inherited wealth does not leave the family. Consider this scenario: your Will leaves assets worth £300,000 to your only daughter. On your death, these assets pass to her and she subsequently gets divorced and her spouse walks away with £150,000. This is money that you have worked hard for and wanted to keep in the family. A Trust can be used to prevent this from happening.
Misconception #3: Trusts only benefit the Beneficiaries, not the Settlors.
A Trust can be created during your lifetime, not only when you die. Many people worry that placing their assets in a Trust now is like locking up their money and throwing away the key. They fear that it will stop them from having control over their assets and hinder the enjoyment of their retirement. At the same time, many parents who wish to gift assets to the next generation to reduce the Inheritance Tax payable on their estate are concerned that their children are not yet ready to manage those assets. Trusts can provide a means of gifting your assets but retaining control as to how they are used.
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