English trust law is a very complex subject. In order to fully understand it, you need to understand hundreds of years of English legal history. But at Brooks Legal, we attempt to make everything as simple as possible. Read on to find out why it may be necessary to write a trust in a will.

What is a trust?

You are essentially entrusting someone to take care of some assets that you want to go to someone else. You are putting your faith in them. Your trust.

Who are the people involved in the trust?

If you are creating the trust, then you are known as the Settlor. The person you have entrusted to hold the assets is known as the Trustee. The person who receives the benefit of the asset is known as the Beneficiary.

Who owns the asset in the trust?

In order to understand this, you need to understand a bit about the English legal system. There are 2 systems of justice running together: Common Law and Equity. Common law is the law as most of us generally understand it to be. Equity is a separate entity that has developed side by side with the common law. If the common law would reach a decision that may be unjust, then equity was there to keep the balance.

Out of these 2 justice systems came the law on trusts, and 2 distinct ways of being entitled to property. One can have a legal interest, while the other can have an equitable interest, usually referred to as a beneficial interest. In a trust, the Settlor hands legal ownership to the trustee – the trustee has the legal interest. But it is the Beneficiary that is entitled to the enjoyment of the trust asset – they have the beneficial interest.

Are there tax imnplications for a trust?

Yes. They are very complex. For the purposes of this article it is important to highlight that we are dealing only with Inheritance Tax (IHT). You can find out more about IHT in general here. Trusts are subject to IHT.  If you want to know how IHT is calculated, then follow this link.

What types of will trust are there?

Life Interest Trust

A trust that provides someone with the benefit of use of an asset for a fixed period of time – typically for the rest of their lives – before being handed to a second set of beneficiaries – the Remaindermen. This would be useful for assets that produce an income. As an example, you could leave the assets on trust for your child to benefit from for the rest of their lives, with any grandchildren they give you to receive the property when your child dies. This could help a financially unreliable child without your grandchildren missing out on an inheritance they may otherwise get.

Right to Reside Trust

A trust that allows someone to live in your house for the rest of their life, while assuring that others will ultimately benefit from the house’s sale. It is a type of life interest trust in that the Life Tenant has the benefit of the asset, while still passing on to the Remaindermen in the end. This is useful if you have children from a previous relationship.

Discretionary Trust

A discretionary trust is how it sounds. The trustee has the discretion to distribute the trust assets to the beneficiaries as they see fit. This may be useful to you if  you had children with varying financial successes and you wanted the trustee to have the flexibility to distribute the assets in varying shares according to the beneficiaries’ needs at the time.

Vulnerable Person’s Trust

This is a type of discretionary trust that qualifies for special tax treatment – no IHT charges will be made for the period that the trust runs. The primary beneficiary is a disabled or vulnerable person. There are other beneficiaries specified as well, but the extent of their benefit must be limited in order for the trust to receive its tax status. If the primary Beneficiary dies, then the trust becomes a Discretionary Trust and would be taxed as such.

Bereaved Minor’s Trust

This is a trust for your children should you die while they are still minors – under the age of 18. These trusts are treated the same way as a Vulnerable Person’s Trust for IHT purposes. There are no charges while the children are minors.

Trust For Bereaved Young People

This trust is essentially the same as a Bereaved Minor’s Trust. However this trust is for people up to the age of 25.

As with a Bereaved Minor’s Trust, there are no charges while the beneficiaries are under the age of 18. Once they have all turned 18 however, they are subject to normal trust taxation for the remaining 7 years that the trust will run for. As such, at the end of the trust, there will be a charge.

Precatory Trust

This is where a Testator gives assets such as jewellery and other trinkets to a beneficiary with a request that they will pass these items on to someone else. Strictly speaking, this is not really a trust. You are indeed trusting someone to follow your wishes, but there is no binding obligation on the trustee to follow them.