The benefits of trusts in Estate Planning

Estate planning is best described as planning for the transfer of assets to the next generation(s) in the most tax efficient way, while talking account of the legal obligations to dependents.  It is worth considering the use of trusts - for both life time gifts and for an inheritance passing under a will. 

What is a Trust?

A trust is a legal device created to deal with the management of property on behalf of another person. 

The settlor is the person who places the asset in trust.  The trustee is the person who holds the legal title to the asset but not the beneficial interest.  The beneficiaries are the people that the settlor wants to benefit from the assets. The trustees hold the title for the benefit of the named beneficiaries. The trustees cannot benefit or obtain any personal advantage from their position as trustee.

Once a trust is established the settlor generally loses all rights to the property unless he/she retains a power of revocation.

There are various types of trust and I briefly define below a discretionary trust and when it may be useful.

A discretionary trust arises where trust property is held by trustees on trust to apply the income or capital for the benefit of specified beneficiaries in such proportion as the trustees in their absolute discretion think fit.  The beneficiaries have no interest in the fund for legal or taxation purposes and they cannot call for distributions in their favour – they can only ask to be considered. The settlor can provide the trustees with a letter of wishes (which has no binding effect) indicating how he/she wishes the trust fund to be managed.

A discretionary trust may be considered useful for the following purposes:

(i)             To ring-fence and protect certain assets

(ii)            To hold asset for young children (assets either passing on death or during lifetime)

(iii)           To preserve assets for future generations – rather than passing all assets to the next generation only

(iv)          To provide for a child with a disability

(v)           To provide for children who cannot manage their own affairs (for reasons other than a disability)

(vi)          To provide for a non-marital partner

For more information on OSK’s Estate Planning service please contact Imelda Prendergast. Sign up to OSK's B2B for more information on Estate Planning.

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