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Trust fund, baby: How setting up a trust helps your child

08th October 2018

Trusts aren’t just for wealthy American college students, in fact they can be highly beneficial for a wide array of different people in different situations, but what exactly is a trust? Trusts are agreements where you give cash, property or investments to someone else to be looked after for the benefit of a third party. Setting up a trust fund involves a settlor, a trustee and a beneficiary: the settlor opens the trust and gives the assets to the trustee, the trustee owns the assets and must manage them in accordance with the rules of the trust and the beneficiary is the person that the trust is designed to benefit.

In this article, the IMC team take a look at trusts. Specifically, we’ll be looking at the benefits of opening a trust, what kinds of trust are out there and how you can go about setting up a trust fund of your own.

 

Why should you set up a trust fund?

There are a multitude of reasons that you may want to set up a trust fund, from controlling and protecting the family assets, to using a trust as an effective measure in estate and inheritance planning. When set up effectively, trusts allow you to drastically lower the rate of inheritance tax paid on the assets.

Trusts are also used when the beneficiary is too young to handle their own finances but you want to ensure that they’ll be more stable in later life. A trust would also be beneficial for those situations where a relative lacks a little self-control and you’d rather not give them a lump sum of money. Whatever your financial situation or reasoning behind setting up a trust, there’s almost certainly a type of trust available that will be suitable for your needs. Read on to discover the different forms of trust that are available.

 

Types of trust

As we’ve mentioned, trusts come in many forms. We’ve outlined a selection of the most popular types of trust below:

    • Bare trust – This is the most simple kind of trust. Quite simply, a bare trust gives everything in the trust to the beneficiary as long as they are over 18.
    • Interest in possession trust – This type of trust allows the beneficiary to draw income from the trust. However, they won’t be able to access any cash as a lump sum, nor will they have access to property, investments or other assets locked up in the trust.

 

  • Discretionary trust – In this trust, the trustees are fully in control and decide exactly how the assets should be distributed. Discretionary trusts are often set up for grandchildren, with the parents acting as trustees to decide when and how to divide the money to the beneficiaries.
  • Non-resident trust – This is a trust where all trustees are resident outside of the UK. This often means that the trustees pay little to no tax on the trust.

 

When setting up a trust, you may be able to mix elements from different types of trusts to make the trust more suited to your specific needs. Furthermore, if the beneficiary of the trust is a vulnerable person, then they will usually pay a lot less tax on any income gained from the trust.

 

Setting up a trust fund

Setting up a trust is certainly a complex affair. As such, it’s important to have professional financial advice when doing so. Once you’ve settled on who the trustees and beneficiaries will be, you will have to create a trust deed.

The trust deed sets out exactly who the trustees and beneficiaries are, which assets will be placed under the management of the trustees and when the trust will begin. It will also outline exactly how the assets are to be managed and how the money is permitted to be used. Finally, the trust deed will also confirm exactly who should receive the assets locked up in the trust when it is terminated.

 

Setting up a trust is a complex affair that, without professional financial advice, has a lot of room to go wrong. To ensure that your trust provides exactly what is needed for your situation, get in touch with the IMC team today.

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