When it comes to estate planning, there are a few different options to choose from. One of the most common is setting up a trust.

But what is the difference between a trust and an estate? And which one is right for you?

This article will discuss the benefits of setting up a trust, what makes it unique, and the circumstances in which you’d choose to set one up.

What is an Estate?

Your estate is the sum of everything you own at your death. It can be divided in two ways, which we’ll look at below:

Making a will

Making a will allows you to allocate your property to the beneficiaries of your choice. This can include the shares you own in your company. If you haven’t made a will, your estate will be passed on using the intestacy rules.

Rules of intestacy

These rules apply if someone passes away without leaving a will or, as the terminology has it, dies intestate. Under the intestacy rules, the estate is left to the spouse or civil partner of the person who dies.

However, only if this is a formal arrangement – cohabiting partners without a civil partnership aren’t eligible. Under intestacy rules, separated spouses or civil partners can inherit if the marriage or partnership hasn’t been legally dissolved.

If there is no spouse or partner, the estate is divided equally between any children, or if the estate’s value exceeds £27,000, the amount over that sum would also be passed to the children.

This would not happen immediately but occur when they reach eighteen or marry. In cases where there are neither spouses/ partners or children, other relatives can inherit.

If none of these apply, the estate is passed onto the Crown. In legal terms, this is known as bona vacantia.

What is a trust?

A common practice for those planning to exit their companies is to put the business in trust. In this arrangement, you, the trustor, would award another party, the trustee, control of the company’s money and assets.

These would then become trust property. The trustee can be an individual or a corporate entity.

The trustee would be obliged to manage the trust property for the beneficiary’s benefit.

The beneficiary

The trust’s beneficiary is the individual or group for which the trust is created. You can determine who this is when setting up the trust. It is possible to make yourself the beneficiary of your trust, but this comes with different tax rules, and we advise against it.

The trustees

The trustees will become the legal owners of your company once the trust is set up. The trustees have to manage the trust according to the trustor’s wishes, as set out in the deed of trust. They will deal with the trust’s assets and pay any tax due.

What Types of Trust Are There?

If you decide it’s the right time to set up a trust, there are several types you can choose from to suit your needs. Below is a rundown of the main types of trust you can opt for:

Bare trust

In a bare trust, the beneficiary has the right to both income and capital and can access them at any time, assuming they are of age (this age can differ in different parts of the UK).

Bare trusts are often used when the beneficiary isn’t yet over eighteen, allowing the trustees to handle their property on their behalf. In a bare trust, the assets go directly to your chosen beneficiary.

Interest in possession trust

In an interest-in-possession trust, the trustee must pass on all the trust income to the beneficiary as and when this arises.

There can be more than one income beneficiary in these trusts. This can be for an indefinite period -in which case they are known as the life tenant- or for a fixed period.

The deed of trust should determine how capital is divided between the beneficiary and the trust itself.

Discretionary trust

In a discretionary trust, the trustees have the power to decide how much the beneficiaries receive and when they receive it. All capital and income are left to the trustees’ discretion, as set out in your deed of trust. This allows for more flexibility for them to react to changing circumstances.

Mixed Trust

As the name suggests, a mixed trust is a trust that combines aspects of the other types of trust. Each part of the trust would have to follow the tax regulations most suitable to that type.

Trust for a vulnerable person

A trust for a vulnerable person is a trust set up for some children or people with disabilities.

To count as a vulnerable person, the beneficiary has to be either a child under 18 without parents or a disabled person entitled to any one of several disability benefits.

They may also be unable to manage their affairs due to mental incapacity. It is possible to claim special tax treatment for these trusts or, if you have several beneficiaries, for the parts that benefit a vulnerable person.

Non-resident Trust

A non-resident trust is when one or more of the beneficiaries are not residents for tax purposes in the UK. It can also be set up if the trustor is themselves not a UK resident.

Why set up a trust?

There are a few main benefits of setting up a trust, which include:

  • provide for someone unable to look after their own money
  • provide for a beneficiary under the age of eighteen
  • provide for someone mentally ill or otherwise incapacitated
  • protect your wealth
  • ensure your wealth against bankruptcy or a change in personal circumstances
  • avoid inheritance tax for your loved ones
  • divide the benefits of your estate
  • specify who benefits from your assets in greater detail than a will allows.

Need more advice?

Setting up a trust can be a great way of leaving your business while still benefiting the people of your choice. As we have shown, you can choose from several types of trust to fit your needs.

Call or fill out an online contact form for any questions about setting up a trust.