How and why to set up a private trust

February 4, 2020 - 6 minutes read

Sometimes in life, you may want somebody else to manage your money for you. 

This could be to pay for your care if you got ill, to provide for your family if you died, or to pass assets to your children, especially when your family structure is complicated by divorces and second marriages.

But rather than just give them access to your bank accounts – where they could potentially use your money for anything they like – it makes sense to use a legal arrangement where they can only use your money in the way you want.

One of the simplest ways to do this, is by setting up a private trust.

What is a private trust?

A trust allows you as the ‘settlor’ to transfer your money, or other assets such as property, land and investments, to the control of an independent ‘trustee’ who is legally bound to deal with the assets according to your wishes, set out in a ‘trust deed’.

The trustee becomes the new legal owner of your assets, and must handle the transfer of them to the ‘beneficiary’ – the person or people you’d like to receive your assets. 

How to choose trustees

Because they’ll be the ones responsible for your assets, you should choose trustees that you can rely on. Most people choose close friends or family members, but you can choose anybody you feel comfortable taking care of your finances.

Another wise option would be to appoint an independent third party – like a corporate service provider – who can guarantee complete impartiality when acting as a trustee. 

Types of trust and their benefits

There are several types of trust, which have a varying degree of benefits depending on your circumstances, but the main ones are: 

Bare trusts – widely used by parents and grandparents to transfer assets to their children or grandchildren. Trustees look after the assets until the intended recipient reaches the age of 18, when they’re legally entitled to the money plus any interest.

Interest in possession trusts – the trustee must pass all trust income received on the assets – such as dividends from investments – to the beneficiary. 

Discretionary trusts – trustees are given certain powers to make decisions on how the trust income (and sometimes the capital) is used. They’re mainly used to put assets aside for a grandchild who may have a greater need for the assets, or a beneficiary who’s not capable or responsible enough to handle money.

Mixed trusts – a mixture of different trust types within a single trust, used when there are several beneficiaries with different status and circumstances.

Settlor-interested trusts – where you set aside assets for your own future income or that of your partner or children. This is mainly used by people who suffer life-changing injury or long-term illness. 

Vulnerable beneficiary trusts – for a disabled person, or someone under 18 whose parents have died. Trustees can also claim special tax treatment.

Charitable trust – you can create a family charity, where gifts to the trust are free of capital gains and inheritance tax. 

As you can see, trusts aren’t just for the super wealthy. They have many practical uses to protect your assets when they’re passed to your next generations.

Plus, because trusts are private arrangements, they’re a great way to plan the future ownership of any family business interests while keeping your financial affairs under wraps. 

Tax – the biggest drawback to private trusts

In the UK, each type of trust is taxed differently, and could attract income tax (on any income earned such as interest or dividend payments), capital gains tax if the asset in the trust increases in value, and inheritance tax.

Trustees will also be responsible for reporting and paying tax on behalf of the trust.

You should look into the specific tax obligations for each type of trust when setting yours up, to make sure your beneficiaries will gain the maximum benefit possible.

How we can help

With over 40 years’ experience helping smart people like you pass assets to their younger generations without a hitch, we can help you:

  • Form a private trust
  • Learn what type of trust best fits your situation
  • Handle the day-to-day administration of your trust
  • Deal with the trust distributions and appointment of trustees
  • Take care of record keeping – a key responsibility of your trustees

Get in touch for a free consultation about setting up a private trust. We are perfectly placed to act as a trustee for you, and may even be able to suggest other options, aside from trusts, that better suit your circumstances.