Five Questions to Ask Yourself Before Setting Up a Trust in Your Will

If you are currently in the process of making a Will, you may be considering including a trust. A trust is a legal mechanism by which assets can be held by certain individuals (the trustees) on behalf of other individuals (the beneficiaries). Choosing the wrong type of trust –or setting one up without proper advice – can result in unnecessary tax exposure, administrative complexity, or even a dispute between your loved ones.

There are various reasons why it might be beneficial for you to incorporate a trust in your Will. The simplest reason might be because you wish to bequeath money and assets to young children. In situations such as these, a trustee will be needed to hold the assets on behalf of the children until they are old enough to take ownership themselves.

Alternatively, there are plenty of more complicated reasons for incorporating a trust in your Will. Some people may wish to explore trusts as a way to manage any potential inheritance tax that may come due on their estate, or they might be keen to set up a trust for charitable purposes, such as establishing a scholarship fund.

Though all three of the above scenarios would come under the same heading of ‘trust’, they clearly have very different purposes and would require very different levels of administration.

If you’re thinking of setting up a trust in your Will, you’ll want to be sure you’re setting up the right type of trust. A solicitor who specialises in this area will be able to help ensure you do this, but it will be helpful to ask yourself the following five questions first.

1. What is the purpose of the trust?

If you want to set up a trust, the most important piece of information is why. Your intended purpose will help to determine what kind of trust mechanism will be the right one for you.

For example, you might be intending to:

• Pass on assets to individuals who wouldn’t yet be able to take legal ownership of those assets due to their age.
• Ensure that your spouse will retain the right to continue to live in your property for the rest of their lifetime whilst still ultimately leaving the value of that property to your child.
• Leave money or property to a vulnerable family member who you believe will need support to manage it.
• Set money aside to be dedicated to charity or a particular cause later down the line.
• Manage your funds in a way that will be the most beneficial in terms of inheritance tax.

2. Who do you want to benefit with the trust?

It’s not just the purpose that will determine what kind of trust is the best fit for your particular circumstances. It’s also important to be clear on who you wish to benefit from the trust.

The key question here is really whether you want to benefit specific named individuals (such as a child or grandchild) or whether you want to benefit a class of individuals (such as ‘grandchildren’, ‘nieces and nephews’ or even ‘scholarship applicants’).

Certain trusts only allow you to benefit specific named people, while others can benefit a class of individuals.

3. Do you want ownership of the assets to definitely pass to the beneficiaries?

Whether you wish all the assets in the trust to pass in an uncomplicated fashion to the individuals named as the beneficiaries to the trust, or whether you want the trustees to have the right to determine whether some or all of the assets will be handed over, is an important distinction.

The latter option is likely to be something you are considering if you’re setting up a trust to benefit a class of people if and when they have specific needs. For example, you might choose to set up a trust offering financial help to any of your future grandchildren who wish to go to university.

In these cases, you will need a discretionary trust that gives trustees the authority to make decisions about whether or not to grant money to beneficiaries on your behalf.

4. Who do you want to look after the trust for you?

It’s wise not to underestimate the importance of who you will appoint to act as trustee. Whatever the purpose of the trust you are creating, it will no doubt be important to you to ensure that both the contents of that trust and the beneficiaries of it are well looked after.

In practice, poor trustee choice is one of the most common causes of delay, cost, and dispute  in trust administration.

Generally speaking, you can choose whoever you wish to act as a trustee, so long as they over the age of 18 and you consider them suitable for the role.

However, you may wish to consider:

• Their financial literacy.
• How organised they are.
• How confident you are that they will be able to carry out your wishes.
• Whether or not they are a beneficiary of the trust in question (or associated with someone who is) and how that might impact on how they will carry out the role.

It’s also possible to appoint one or more professional trustees if you feel they would be more suitable for the role.

5. When is the right time to set up the trust?

Many people incorporate instructions to set up a trust in their Will. This means that their executors will need to set up a trust on their behalf during the process of administering the estate. However, it’s also possible to set up a trust in advance yourself.

Depending on the purpose and type of trust you are considering, the latter option might make more sense. This is particularly likely to be the case if your main purpose for setting up a trust is related to inheritance tax planning. However, it’s important to be aware that any assets you place in a trust are not always immediately exempt from inheritance tax. This is due to the rules on inheritance tax gifting.

If you were to die within seven years of setting up the trust, any assets held by that trust would still be subject to inheritance tax – though, they would likely be taxed on a sliding scale depending on how long the trust was set up before your death.

Inheritance tax treatment can be complex: depending on the type of trust and the value transferred, there may be inheritance tax considerations when assets are placed into trust and/or if you die within seven years. We’d always recommend seeking professional advice on your particular set of circumstances.

What are the next steps?

Whether you’ve given a lot of thought to the questions above, or whether you wish to talk your options through, you’ll likely benefit from sitting down with a qualified professional.

Our specialist solicitors will help to ensure you have covered all bases when setting up a trust in your Will. Why not get in touch to set up a complimentary discovery call to see how we could support you through the process?

FAQs

How many different types of trust are there?

There are a range of different types of trust. This includes bare trusts, discretionary trusts and life interest trusts. The right type for your particular circumstances will depend on what your purposes for setting up the trust is, who you wish to benefit and how you wish them to benefit.

What should you consider before you set up a trust?

Setting up a trust is an important legal step. It’s vital to consider factors such as: the overall purpose of the trust, who you wish to benefit from it, whether or not you wish the beneficiaries to be entitled to everything in the trust, who you would like to act as trustees, and when the best time to set up that trust might be.

When is the best time to set up a trust?

You can choose to set up a trust at any time. It’s common for people to request that their executors set up a trust in the process of administering their estate, but you can choose to do it yourself long before this, too.

What are the first steps to setting up a trust?

Once you have given some thought to setting up a trust, the next step will be to talk things over with a specialist legal professional. An experienced solicitor will be able to guide you successfully through the process.