The trouble with trusts – are they brilliant or terrible?
Mary Casey, Private Client Lawyer at Parfitt Cresswell
There is a lot of information about Trusts online and in the news. Yet while it is easy to find articles both in favour of and against Trusts, the available information can be conflicting and confusing, and hard to apply to our own circumstances.
As a result, I am often asked to explain trusts to clients and professionals. My starting point is that “a trust is a way of making a gift, but attaching conditions to it” and, whilst somewhat simplified, it is the case. Most of us can appreciate why conditions are helpful to gifting: you may want to give a gift to someone who is too young or too vulnerable to appreciate it. In this case, you would stipulate an age at which they should receive the gift; you could include conditions such as ‘having a job’, ‘having a house’ or ‘being married’.
In most cases, we would just not make the gift until we are satisfied that the recipient is ready to receive it and will make good use of it. But if we wish to make a gift with conditions after our death, then we have to rely on others to assist in making the gift when the condition has been met. This is where trusts come into effect.
Whenever something is given to someone to look after for someone else, with a set of rules to govern how they should do it, a trust exists. We normally give names to the different roles: the person who is responsible for looking after the gift is the ‘trustee’; the person who is going to receive the gift is the ‘beneficiary’; and the person who gave the gift in the first place is the ‘settlor’.
Trusts also allow gifts to be made for a period of time or for specific reasons. When the period ends or the reason is complete, the gift can be passed on again in line with the wishes of the settlor, even if they are no longer around to make that decision.
When are trusts brilliant?
Trusts offer control, and so are best in circumstances in which you want to ensure you or people you trust have control over a gift while another person gains a benefit. Trusts can not only protect beneficiaries, but also save on tax.
For example, gifts left to a spouse to look after for the remainder of their life—but which will revert to a different individual later—can be very beneficial when you are concerned about remarriage, care costs or potential manipulation.
Trusts in Wills also allow an individual to protect their own assets from being swallowed up by the care costs of a surviving spouse should they require care, ensuring something is available for children. Trusts in Wills also help those with more complex family structures to look after all their family members appropriately over a longer period of time.
For unmarried couples, a trust can prevent tax being paid twice on the same assets. Unmarried couples introduce their own complexities with tax, and much of that can be alleviated with effective use of trusts.
When are trusts terrible?
Trusts can be terrible when the wrong type of trust is used at the wrong time, or for the wrong purpose. A life-interest trust for an unmarried partner, for instance, is typically a very poor choice for tax.
Trusts created in a lifetime, rather than in a Will, usually also need far more thought and care. It is usually entirely inappropriate to put someone’s home into a trust during their lifetime for instance; the outcomes can include very large, unexpected tax liabilities, and a lot of money spent on costs in trying to ‘fix’ things later. We spend a lot of time fixing mistakes for clients for whom such solutions have been mis-sold.
Trusts rarely improve the position for someone’s own care fees, and are often sold by practitioners to reduce ‘probate fees’. The ultimate result is usually far more being spent to solve the problems, and paying more tax later.
There are longer-term consequences when Trusts are created, and there is often very little advice provided on the on-going administration and tax consequences when they are set up—especially when a legal professional has not been consulted.
A little knowledge
While Trusts are relatively specialised, the actual creation of a trust is not a difficult exercise, and usually only consists of a piece of paper. Whilst it’s rarely wise, a few lines of text could create a trust. As the wording is readily available online, it is easy to achieve, and plenty of people sell services by which they create trusts for others.
The greater complexity then comes from all of the things that are not in the document. Trusts are controlled by lots of statutory rules and case law, and are affected by tax. With trusts, we typically have to consider at least three taxes: Inheritance Tax, Income Tax and Capital Gains Tax, as well as Stamp Duty Land Tax when property is involved. While most of this information is readily available online, the value is not in knowing all the rules, but in applying them carefully and considerately to someone’s circumstances with the broader picture in mind.
The solution for one person is not the same as for another, because facts differ between cases. The value we can offer is in our knowledge and awareness of the bigger picture. As a result, we will decline to prepare a trust if it is not the right thing for a client. We are often approached by people who have read an article such as this, or have spoken to a Will writer, and have an idea that a certain trust would solve their perceived problem. In many cases, it may solve one problem only to create bigger ones at a later date.
If we create a trust, then our client will have an understanding of its purposes and limitations and the tax consequences, and have given appropriate thought to the trustees. There are a lot of people with ill-will towards trusts as they have experienced those created inappropriately. We want to put trusts where they belong in the process of estate planning – one of many tools that can be used appropriately, but not excessively.
