By: Simon B
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Advice on Trusts
Trusts are useful, if sometimes complex, legal way of giving your money, property or shares to others, whilst ensuring that you or others that you trust retain some control over what happens to those assets.
They are often used to avoid paying unnecessary Inheritance Tax, or for helping to solve long-term family or domestic situations, such as giving money to children or grandchildren at an age when they can be considered to be responsible.
You can create a Trust while you are alive, usually by a formal Trust deed (this is usually referred to as a “settlement”), or you can create a Trust on your death in your Will (a “Will Trust”).
The Trust document will set out what is being given away, who is going to look after it (the “Trustees” – you can include yourself in lifetime Trusts), who is to benefit from the gift (the “beneficiaries”), and any rules that the Trustees must follow when looking after the assets – for example, what they can and cannot invest in; how the capital and income can be spent; and how long the Trust is to go on for.
What is a testamentary trust?
A testamentary discretionary trust provides the trustee with similar discretionary powers to a family trust. With this trust fund, the entitlements you wish your beneficiaries to receive are not fixed but instead are determined by how you want them to be passed on.
It is normal for you to leave a letter of wishes to give your trustee guidance on their discretion but it is important to note that your trustee is not legally bound to carry them out but how closely they follow your guidelines is up to who you to choose.
It is also important to know what to expect from the trustee as they have the discretion to distribute your capital and income between the group of beneficiaries you have stated. What makes discretionary trusts different is that firstly, the trustee has the power to determine what beneficiaries will receive payments from the trust and secondly, the trustees can select the amount of trust property they receive. With this trust, you can also allow the trustee to add or remove beneficiaries.
There are two types of testamentary trust: exhaustive and non-exhaustive.
This is where your trustees must distribute all the income in the trust fund.
This is where your trustees have the power to accumulate the income themselves and then distribute it. Although trusts, in general, provide power to distribute and manage your estate, a discretionary trust is generally for the distribution of income only.
Would it be better to set up a revocable living trust instead?
It is rather common that solicitors will advise you to set up a revocable living trust as opposed to a testamentary trust. In the process of a revocable trust, you would accept all the legal fees upfront to establish the trust before you die, which will mean you can bypass the probate in the future. It also means that you would name yourself as the trustee, maintaining the control of your assets until you die. When you die, your successor trustee will take control of your trust and manage your assets for the beneficiaries. A revocable living trust can also offer tax benefits by expanding exemptions to the federal estate tax.
Advantages of a testamentary trust
The main advantage of a testamentary trust is the fact that you can provide for your children or other beneficiaries at a time in the future which you decide. The upfront costs are also low and are usually just the costs of preparing the Will to address the trust and the fees involved in dealing with the judicial system during probate.
The trust also has the ability to be very flexible in terms of your trustee. You can name anybody you trust, even a family member. You can give strict guidelines on how you want the trustee to handle your trust or leave it up to their own discretion.
You can also take advantage of tax benefits when setting up a testamentary trust, especially when you leave part of your estate to minors. With a testamentary trust, minors can receive thousands of pounds a year without paying any taxes on it, as opposed to family trusts.
Another advantage of a testamentary trust is that you can protect your money from creditors. This means that your beneficiaries will receive all the money they had coming to them and will not have to use their money to pay off any of your debts.
Disadvantages of a testamentary trust
One disadvantage, which is more of a disadvantage to the trustee, is that they have to meet regularly (about once a year) with the probate court to prove the trust is being handled according to your own wishes. This will involve legal fees and expenses, as they are deducted from the estate.
As the trustee must oversee the trust for its entire duration, a copious amount of time and effort has to be put in, which is potentially exhausting the trustee mentally and physically. A further disadvantage is that the trustee that you want can refuse to accept the role as they have no legal obligation to. If no one is named, the probate court will nominate somebody elected by them.
A further disadvantage is a potential for conflict to arise between the trustee and the beneficiaries.