A Trust is a legal entity that holds assets for the benefit of another. It becomes easy if you think of a trust like a container holding property for somebody else. The assets you choose to put into a Trust depend largely on your goals.
You can create a Trust in your lifetime (when you will be known as the Settlor) or Trusts can be established by your Will. After your death, the assets you have selected pass through your Will and are held within the Trust.
Since Trusts can be used for many purposes, they are a popular estate planning tool. They are often used to:
- Minimise estate taxes;
- Shield assets from creditors;
- Avoid expense and delay in administering your estate after death;
- Preserve assets for your children;
- Create investments to be managed by professionals;
- Set up a fund for your own support in the event of incapacity;
- Provide benefits for charity; and
- Shield assets from assessment to care fees
Lifetime trusts are often known as asset protection trusts. They are an effective way of setting aside some or all of your assets for a child, grandchild, or a disabled or vulnerable person’s future care. If you wish, you can play a direct role in the trust, as a trustee.
Deciding on the right kind of trust for your particular situation, understanding the tax implications, and reporting obligations make for a detailed and demanding task. It is therefore best to take legal advice if you are considering creating a lifetime trust.
Unlike will trusts, which come into being on death, lifetime trusts are established straight away.
You decide who the beneficiaries of your lifetime trust will be, and anything can be put into such a trust. For instance, this can be cash, or property.
Lifetime trusts are far more expensive than basic wills or will trusts and generally cost around £2,000 plus VAT to set up, although it will depend on the type of trust you want to create.
Generally, lifetime trusts are either fixed interest, where the beneficiary has an absolute right to capital and income from the trust investments, or discretionary, where the trustees have a pool of potential beneficiaries and have a discretion how to benefit any of the potential beneficiaries. Usually a discretionary trust will have a letter of wishes for the trustees to consider, which may favour one beneficiary over the others.
The tax treatment of lifetime trusts is worth considering carefully. Assets put into a lifetime trust can attract an immediate charge to Inheritance tax at 20%, if they are worth more than the nil-rate band (currently £325,000) The trustees would also need to submit a tax account to HMRC, and there may be further Inheritance payable every 10 years, as well as when assets leave the trust. There is also the issue of income tax on any payments from the trust.
However, the tax treatment of fixed interest trusts is different from discretionary trusts.
Lifetime trusts are attractive to those who do not want to wait until they die to pass on their assets to a loved one.
Where land or property is held by one person for the benefit of another, a property trust arises.
Property trusts can also arise where more than one person owns a property jointly with another. The legal title is owned by the two owners, but their respective interests in the property may be different because, for instance, they have put different amounts towards its purchase price, or only one of them pays the mortgage. Each owner can choose how their interest in the property is to be dealt with if they separate by entering into a Declaration of Trust to expressly provide in what proportions they wish to their interests to be dealt with in such circumstances.
Sometimes a person may own a property solely in their name, but the property purchase has been funded by two or more people. A property trust arises in these circumstances also.
Recent case law has highlighted the difficulty in determining a party’s share in a property where an express Declaration of Trust has not been made. The potential consequences of not making a Declaration of Trust at the time of property acquisition include the possibility of dispute, becoming involved in litigation later on and incurring costs as a result, and the possibility that the court will divide the property in a way that is different from what you intended.
A Declaration of Trust can declare how you intend to hold equal or unequal shares in a property, how the purchase monies have been provided and, in the case of unequal contributions, how this will affect your position on separation from your co-owner. If you and your co -owner intend to hold unequal shares in the property, the Declaration of Trust will record the size of the shares that you have agreed to own.
Sorting this out at the time of your property acquisition will prevent costs and disputes arising in the future. You can download, complete and return our property trust questionnaire if you want to instruct us.
You should also make a will at the same time as making a Declaration of Trust.
Let's look at some examples of Declarations Of Trust:
- Miss A is purchasing her first home with the benefit of a mortgage. Her parents are putting up some of the purchase price on the basis that they will share any ‘profit’ made on the property. The registered owner on the title deeds of the property will be Miss A but her parents can register their beneficial interest in a Declaration of Trust. By completing the same the beneficial interest of the parents is protected without them having to be named on the mortgage deed themselves. It states the percentage contribution made by the parents and the percentage of proceeds of sale due to them.
- Mr B and Mrs C are both contributing to buying a home together but Mrs C is still an owner of a different property with an existing mortgage. She cannot be party to another mortgage because of that. A declaration of trust is needed to state the beneficial interests and protect Mrs C’s interest as an actual owner of the property, with Mr B as the legal owner and the sole mortgagee. The Declaration of Trust will state the percentage contribution made by Mrs C, and the percentage of proceeds of sale due to Mrs C.
- Mr D and Mrs E are buying a property together, but are providing different contributions to the purchase price. They wish their contributions to be reflected in a legal document. Mr E is to own 60% and Mrs E is own 40%. Upon sale they will get a respective share of the net proceeds. A Declaration of Trust will record each person’s contribution and the proportions of the property they own.
Things to think about
You need to be absolutely certain of the decision that you are making to share ownership of a property as a Declaration of Trust changes the beneficial ownership. The purchase of a property is a long term commitment, longer than some marriages and a trust deed reflecting the true ownership must be just that: the true ownership.
Work out very carefully the proportions in which you will own the property, and don’t forget to include the costs of the purchase in your calculations. If only one party is paying for the stamp duty, that should be taken into consideration when you work out the percentages. The proportions that you set out in the trust deed are the proportions that will be used to distribute the sale proceeds when the property is sold (or possibly the amounts that each party has to pay for the property to be sold if the property loses value).
The registered and true owner(s) must complete the Declaration of Trust together. If the Declaration of Trust is completed without all parties’ knowledge and consent, then registration of the Declaration of Trust could be considered fraudulent.
Property Protection Trust Wills
Most people know that making a Will is very important for you and your family. We regularly see couples who are concerned about preserving wealth for their children and grandchildren when they die. Unfortunately many couples aren’t aware of a potential trap that can significantly reduce the amount their children and grandchildren could inherit.
For instance, if you are married with adult children and own a house worth £250,000 and have savings of £50,000 between you, you will most likely want to pass everything to the survivor of, and when the survivor dies, everything to your children. This is a typical arrangement for married couples with children.
So on the first death in accordance with the Will, the estate of the deceased passes entirely to the survivor who then has all the assets £300,000 in their name.
If the survivor needs care in the future they will have their finances assessed by the Local Authority and if they have more than £23,250 they will have to pay for their care home fees. The cost of the care home could be as much as £40,000 per year so if the survivor stays in the home for 5 years until death, the total cost amounts to £200,000, leaving only £100,000 to pass to the children on the survivors death.
For some couples this scenario is fine, but for many couples it won’t be. There is a desire among many people to try and protect as much of their wealth as possible from being used for care home fees.
The good news for couples living in England and Wales is that, with the right advice, there is a way to protect at least half the value of the family home and keep it for the children. This is achieved by writing your Will in such a way that it puts half the family home into a type of Trust when the first spouse or civil partner dies. The terms of the Trust also mean that the surviving spouse or civil partner can continue to live in the property held within the Trust. These are called Property Protection Trust Wills.
By preparing a Property Trust Will in the right way, the value of half the home is ring-fenced by the Trust so that it isn’t taken into account if the surviving spouse is financially assessed for residential care home fees. The reason is because half of it is owned by the Trust and the other half is owned by the surviving spouse or civil partner.