Family Trusts Explained

The family trust can be an effective way of making financial provision for your loved ones, both during your lifetime and after you die. This type of trust can be used for all sorts of different reasons, from helping to fund a child’s education to mitigating the cost of care home fees or inheritance tax.

In this ‘Family Trusts Explained’ guide, we look at the commonly asked questions when considering setting up a family trust.

Family Trusts Explained: What is a family trust?

A family trust is a legal mechanism between three parties: the settlor, ie; the person investing in the trust, the trustee(s); ie; the person appointed to manage and administer the trust fund, and the beneficiary, ie; the person(s) nominated to benefit from that fund.

The family trust can take effect during the course of the settlor’s own lifetime, for example, to help fund a child’s education or to mitigate the cost of care home fees. This is known as a living trust.

A family trust can also take effect upon the settlor’s death, for example, to bequeath assets to loved ones, with the trustees keeping control of those assets until the beneficiary reaches the age of majority. This is known as a testamentary trust.

Family Trusts Explained: Different types of family trust

There are various different types of trust that can be used in different ways, with benefits and drawbacks to each.

The bare trust

The bare trust is the most straightforward type of trust, whereby a parent or grandparent can create a trust fund to which their children or grandchildren will become entitled to once they turn 18. Indeed, under the bare trust, the beneficiary become automatically entitled to any income and capital contained within the trust.

Bare trusts are often used to hold investments for children and grandchildren until they reach the age of majority, or to pass on assets upon the death of the settlor where the beneficiaries are still minors.

The discretionary trust

A discretionary trust is much more flexible than the bare trust in that the there is no one beneficiary with a fixed or absolute entitlement to the trust fund, rather the trustees have the discretion as to when, to whom and to what extent anyone benefits from the trust fund.

Typically, the settlor will nominate a class of beneficiaries, for example, all their grandchildren, allowing the trust fund to make provision for both existing and unborn beneficiaries.

The interest in possession trust

The interest in possession trust caters for two types of beneficiary: the income beneficiary who has an immediate entitlement to any income produced by the trust assets as and when that income arises, as well as the capital beneficiary who will receive the entirety of the trust fund at a specified point in the future.

This type of trust is commonly used in wills to provide an income for life for a surviving spouse or partner upon the settlor’s death, whilst preserving any capital assets for the settlor’s children at a future date.

The accumulation and maintenance trust

An accumulation and maintenance trust is a particular type of trust intended to make provisions for children and young adults up to the age of 25.

Combining the features of both the discretionary and interest in possession trust, the trustees are given discretion over how to use the income for the benefit of the child or grandchild up to a specified age. Thereafter, the child or grandchild will acquire the absolute right to the trust fund.

The mixed family trust

A mixed trust is, as the name suggests, a combination of different features from various kinds of trust, tailored to suit a particular set of the circumstances, as with the accumulation and maintenance trust.

In this way, with the right legal advice, the settlor can create a family trust that specifically meets the needs of their loved ones, both now and in the future.

Family Trusts Explained: Who should I appoint as family trustees?

Under a family trust, you would usually appoint yourself as trustee, as well as other family members over the age of 18 years. You can appoint more than one trustee, although the maximum is four.

By way of example, a grandparent setting up a trust to pay for a grandchild’s university fees, may choose to act as trustee, but also appointing the grandchild’s parents to help jointly manage the fund.

Choosing a trustee requires careful thought and consideration, not least because in creating a trust you are effectively giving up ownership of the assets in question and transferring legal title to the trustees. The trustee will then take responsibility for managing the money or assets that you have set aside in the trust for the benefit of your nominated beneficiaries.

The trustees must use the money or assets in the trust fund solely for the beneficiary’s benefit, and everything the trustee does must be done in the beneficiary’s best interests.

Family Trusts Explained: What can family trusts be used for?

A family trust can be used in various different ways to meet different goals, including the following:

  • To make financial provision for a child or grandchild once they have reached a certain age. Under a bare trust the beneficiary will have the automatic right to access the trust fund at the age of 18. Under a discretionary trust, the settlor can provide the trustees with guidance in what’s known as a ‘Letter of Wishes’ as to when to distribute the trust fund.
  • To make financial provision for both a surviving spouse, as well as the settlor’s children. Under an interest in possession trust the spouse can benefit not only from any income generated from the trust fund, but also living in the trust property for the duration of their lifetime, whilst protecting that property and any other assets for the settlor’s children.
  • To make financial provision for future generations. Under a discretionary trust the settlor can nominate a class of beneficiaries, for example, all their grandchildren, both existing and unborn.
  • To make financial provision for several different beneficiaries, both during the settlor’s lifetime and/or upon death, catering for various different family members at various different times. A discretionary trust could be used to pay for the tertiary education of different grandchildren, as and when they reach university age.

Family Trusts Explained: What are the benefits of setting up a family trust?

If set up at the right time and for the right reasons, the family trust can offer a number of benefits for all involved, including but not limited to the following:

  • Helping to fund educational costs whilst making significant tax savings. Any money or investments transferred into a bare trust by a grandparent are taxed as if they belong to the grandchild, which usually means there is little or no tax to pay on any income or gains. Unfortunately, this same rule does not apply to parents, whereby any gift over and above £100 will leave the settlor liable to pay tax.
  • Maintaining control over assets until a child or grandchild reaches the age of majority, or an age at which the trustees deem that individual able to manage their trust fund responsibly. In this way, the family trust protects the assets from financial irresponsibility.
  • Protecting assets from bankruptcy and divorce. Where a beneficiary is being chased by creditors or a divorcing spouse, the family trust preserves and protects the trust assets from being brought into account.
  • Mitigating the cost of care home fees. By transferring the family home, for example, into a trust, assuming this is done well in advance so as not be be treated by the local authority as a deliberate deprivation of assets, this may prevent the property from being sold to pay for care costs.
  • Minimising any inheritance tax liability upon the settlor’s death. Any gift made into a bare trust should be treated as a potentially exempt transfer. Assuming the settlor survives for more than seven years thereafter, there will be no inheritance tax liability on that gift.

Family Trusts Explained: What will be involved for parties to the family trust?

The family trust, if set up correctly, can be extremely effective in helping families preserve and protect their wealth. That said, this is a complex and constantly changing area of law that requires expert knowledge.

Moreover, there are various different types of trust to choose from, and selecting the right one to suit your family’s needs can be confusing.

By seeking legal advice, you can feel confident that you have explored all available options, letting your legal adviser tailor a trust especially for you. Your adviser can also help you with how to manage and administer the trust in accordance with the trust deed, expertly drafted on your behalf.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal advice should be sought.

Family Trusts Explained 2
Lawble
Lawble is a leading legal resource aimed at supporting people and businesses alike by providing reliable information, legal resources and links to leading and reputable legal service providers.

More from author

Related posts

Legal Buying Guide

Choosing a Legal Adviser

Legal advisers are there to help you understand your rights, and to use the law to solve your problem. They should do this in...

Legal Advice for Businesses

Businesses need legal advice for many reasons. Whether you are employing people, signing contracts or dealing with a dispute, good legal advice can help...

Legal Advice for Individuals

Whatever your situation, it helps to understand the legal issue you're facing and what kind of advice you might need. Spending time understanding what you...

Want to stay up to date with the latest news?

Fill in your details and we'll stay in touch with email updates on personal law matters. It's that simple!