22 FAQs about trusts for children and other family members.
- How do trusts work?
- What are the advantages of setting up a trust?
- How do I set up a trust?
- What is a bare trust?
- Can I set up a bare trust secretly, so beneficiary does not take control of the assets at age 18?
- What is the tax treatment of a bare trust?
- What is the difference between an interest in possession trust and a discretionary trust?
- What is an accumulation and maintenance trust?
- Who should be the trustees of my trust?
- How much does it cost to set up and run a trust?
- How are assets within a trust managed?
- How can I make sure the trust is managed the way I want it to be?
- What tax is payable when assets are put into a trust?
- How much tax is payable on trust income?
- What is the tax treatment of capital gains made by a trust, and capital paid out to a beneficiary?
- Can I reduce the likely inheritance tax liability when I die by putting assets into trust now?
- Can I include a trust for my child in my will, and what will the tax consequences be?
- Can I include a trust for my spouse in my will, and what will the tax consequences be?
- What is the tax treatment of a trust set up for a disabled beneficiary?
- Can I reduce potential tax liabilities by setting up a trust offshore, or for the benefit of family members who live overseas?
- Can I use a trust to retain control of my assets but reduce my tax bill?
- Can I use a trust to protect my assets in case of divorce or bankruptcy?
1. How do trusts work?
Normally, whoever owns assets also benefits from them. But in a trust, ownership and benefit are separated. The trustees (or a trust company) own and look after the assets of the trust on behalf of the beneficiaries (who are not usually the same people as the trustees).
Broadly speaking, the trustees have a duty to act in the interests of the beneficiaries. A trust deed, or some other form of documentation, should set out the purposes of the trust and how it is to operate.
2. What are the advantages of setting up a trust?
Setting up a trust is a flexible way of giving away assets without simply passing them directly to the beneficiaries. For example, you can use a trust to:
- Look after assets for beneficiaries who are not capable of doing so themselves - for example, children or a mentally incapacitated dependent - or where you feel the trustees would manage the assets more sensibly.
- Help ensure that control of the family business remains within the family.
- Reduce the risk that a beneficiary will lose the assets (eg in case of bankruptcy or as part of a divorce settlement).
- Provide a lifetime income for one beneficiary (eg your spouse) while retaining the capital for the benefit of other beneficiaries (eg your children or grandchildren).
A trust can also be used as part of your tax planning to help reduce potential tax liabilities.