24th January 2022

Lifetime Trusts

Are you intending to make significant financial provision for young persons to take effect now during your lifetime?

If so, then trusts can be a particularly suitable vehicle for that intended gift where the person receiving  the funds is too young or too immature to be able to look after and manage them.

With a trust, the assets are managed inside the trust by the trustees to make sure that the trust assets are not rashly spent and, if appropriate, the assets are preserved for the longer term.

Often it will be the trustees who control when the intended beneficiaries receive income and alternatively can allow entitlement to the underlying capital. Decisions as to when funds will be appointed or advanced will frequently be at the trustees discretion or choice.

There can be complexities if the trust is set up by a parent for their child if the child is under the age of 18, if that is a trust designed to take effect immediately i.e. not on the date of death of the person setting up the trust so it is always sensible to seek legal and financial advice as appropriate whether this type of trust mechanism is suitable for your family’s needs.

Why would anyone wish to set up a trust during their lifetime as the assets would then be beyond their own use? Frequently it will be by reason of tax planning so as to ensure a reduction in inheritance tax likely to be imposed on death but for that, under the current rules, the person making the trust must outlive the making of the trust by seven or more years and that rule is absolute.

You may have been deterred from considering a lifetime trust due to the risk of potentially adverse tax effects but there are no such ‘settlor interest’ traps if the person making the trust is not a parent/step parent but is a grandparent/step grandparent or if the person benefiting under the trust is over the age of 18.

What type of trusts are available?

The first is a Bare Trust. In this example the person setting up the trust just wants to start the seven year time period for the Asset to be outside of their estate and has to accept that the intended recipient will have complete control over the fund or asset in the trust on their 18th birthday. For that reason, such trusts are frequently not favoured by those considering setting up trusts but they can, nonetheless, have significant advantages from other taxation perspectives such as not being a chargeable transfer which can be useful if the person setting up the trust has already used their nil rate band allowance over the last seven years with other previous chargeable transfers.

The next type of trust is an interest in possession trust. With this type of trust, assuming the intended recipient is over The age of 18 years of age already, all they have is a right to income or the present enjoyment or use of the capital assets such as a house. They have no automatic right to the underlying capital unless the trustees agree to that action and alter the terms of the trust which will have other taxation implications as well. But such trusts can be useful if there is a perception that the beneficiary is not good at managing money, may have relationship trauma ahead of them or be at risk of insolvency.

In the next piece we will look at other types of trust such as discretionary trusts, bereaved minor trusts, 18–25 trusts and vulnerable persons trusts.

For clear information and expert legal advice about all aspects of lifetime trusts (including establishing a new trust, ending an existing trust, whether an existing trust can be ended early, whether the trust can be changed and the appointment and retirement of trustees) please do not hesitate to contact Edward Walter or the Private Client Department at Buss Murton Law who will be happy to assist you.

Edward Walter

Edward Walter