Under English law, ownership of property (this is any asset, rather than just ‘real’ property such as land or buildings) may be divided into two categories: legal and beneficial.
A trust, or settlement, gives to the trustees the legal ownership of property to hold that property for the enjoyment of the beneficiaries.
There are several types of trust, some of which are quite specialised or unusual. However, the three main types are:
1. Bare trust. This is the simplest type of trust, where a person or persons (the trustees) hold the assets specifically for the benefit of another person (or persons) who, for whatever reason, are unable to hold the asset in their own name.
An example of this might be where, in his Will, someone has left some shares and his house jointly to his grandson and granddaughter, and these grandchildren are, say, respectively 4 and 6 years old.
Legally they are unable to hold shares or property in their own name and unable to sign a contract for sale.
Accordingly the trustees (who will have been appointed in the Will) will have the shareholding and property transferred into their own names as trustees.
Although they are the legal owners, they cannot benefit from these assets themselves, as they are merely holding them “on trust” for the benefit of the grandchildren.
If no conditions have been attached in the Will, when the grandchildren have reached the age of 18 the assets can be transferred into their names.
If the trustees sell the assets before, the proceeds of sale will be held for the benefit of the grandchildren.
2. Interest in possession trust. In this type of trust, the assets are held for the benefit of a beneficiary for a defined period, often ‘for life’.
In such an example, the beneficiary who has a life interest will be entitled to all the income and interest arising in respect of the asset, without actually owning that asset.
Usually on their death, the asset will pass to another beneficiary (or class of beneficiaries) either again for life, or else absolutely – if the latter, then this second beneficiary (or class) will actually own the asset outright.
These trusts are frequently used in Wills, often when the person making the Will (‘the testator’) is a widower who has remarried.
It is common in such a scenario for the testator to leave his home to his second wife for life and on her death it passes to his children from his first marriage.
The testator will have achieved security for his (second) wife, while ensuring that the home in due course passes to his children, since his wife does not actually own the property, which will be registered in the name of the trustees.
3. Discretionary trust. In these trusts, the trustees have a discretion as to who, from the class of beneficiaries named by the person who set up the trust (‘the settlor’), is to benefit from the assets in the trust and to what extent.
Discretionary trusts can be set up in a Will or during the lifetime of the deceased.
If it is the latter then the settlor can be one of the trustees.
For example the settlor may have surplus funds that he would like to transfer out of his estate so that these will not be liable to inheritance tax on his death.
However he may not want the assets to pass to his children or grandchildren immediately.
In addition, he may wish a child who pursues further education or takes a worthwhile but poor-paying job to benefit more than a child who is in a well-paid job, but at present he does not know what paths they will follow.
As long as neither he, nor his wife or civil partner, is a potential beneficiary under the trust, as soon as the funds leave his estate and are transferred into the trust, the ‘clock’ starts to run for inheritance tax. and, all being equal, will no longer be included at his death as long as he survives for seven years.
However, he may decide to retain some or all of the assets (or funds) in the trust for as long as he wishes and need not make payments to his children (or grandchildren) for many years, and can decide at that time how much each should have.
Even if he should die before transferring the assets, the trust will remain in place as long as it is needed.
If he had simply kept the assets and waited until his children reached the age where they continued studies or took jobs before making the decision, the ‘seven year clock’ would not start running until he transferred the assets.
It is possible for a trust to be a combination of say, an interest in possession trust and a discretionary trust.
For example, in a Will the testator may give a life interest in a portfolio of investments to his wife, and on her death to such of his children and grandchildren and in what shares, as his trustees decide.
Please contact us if you feel that a trust would be useful for your particular circumstances.