Why create a Trust?

A trust will typically be created in order to protect beneficiaries who may not be able properly to look after assets themselves e.g. because of their age or mental incapacity.

Trusts can also be created for tax-planning reasons. The most usual types of trusts which can be created are listed below:-

Bare Trust

This type of trust is not, strictly speaking, a trust at all. It arises where an asset is held in the names of trustees but the trustees only nominally own the assets within the trust - the real owners are the beneficiaries. Such trusts arise commonly when children are entitled to assets but they are not old enough to have legal authority to deal with those assets.

Interest in Possession Trust

Under this type of trust a person (normally known as a tenant for life) is entitled to the income from the trust but is not entitled to the capital. Such a trust might arise when, say, one spouse dies and wishes to leave sufficient funds to the surviving spouse for the rest of his or her life, but at the same time wishes to ensure that the surviving spouse cannot dispose of the capital assets.

Accumulation and Maintenance Trust

These trusts are often set up for children or grandchildren and there are a number of tests which have to be satisfied before the Inland Revenue will accept them as true "accumulation and maintenance trusts". It is this type of trust which we normally recommend should be created in the case of a client who is making a will in circumstances where he or she might die leaving young children. The trust can be created on flexible terms e.g. the trustees might be given the power to stipulate that different beneficiaries can inherit assets from within the trust on differing terms and in differing amounts. For example, if one beneficiary is considered to be less responsible than another beneficiary then the date upon which the irresponsible beneficiary inherits assets can be at a later date (and upon different terms) than the responsible beneficiary.

Discretionary Trusts

The trustees of a discretionary trust have, as might be supposed, a discretion as to how they treat the assets within the trust. This discretion will apply both to capital and income in the trust. The trustees will not normally have an absolute discretion as the person creating the trust will stipulate the people or charities in respect of which the discretion can be exercised. If a settlor is concerned about the way in which trustees can exercise their discretion then, in the case of a lifetime trust the settlor can be a trustee himself. In all trusts the settlor can also sign a letter of wishes, which gives non-binding instructions to trustees as to how the settlor would wish their discretion to be exercised in the future.

Trusts which are often included in wills are "Nil Rate Band Discretionary Trusts". See our comments under the heading "Estate Tax Planning" in this connection.

What responsibilities does a trustee have?

The provisions of the Trustee Act 2000 have now come into force and can affect any trusts, even one established well before the Act was made.

There is a duty on trustees to invest funds in their hands with a view to producing a financial return for the trust. In performing this duty they must exercise proper care. This requires more than mere honesty, good faith and sincerity - there must be proficiency and competence too.

Trustees have to observe some standard investment criteria:-

Suitability to the trust of the kind of investments which may be made

The need for diversification and investment as far as is appropriate to the circumstances of the trust.

However, this should not be treated as an exclusive list of criteria and the circumstances of each trust must be taken into account.

Trustees have to exercise their duties honestly and fairly.

Please do not hesitate to contact Mark Burn or Claire Waterhouse in complete confidence if you wish to discuss any matters relating to this area.