Trust me – what is a trust fund, and why might you use one?

1 November 2017

During October I was very pleased by the findings relating to trusts of HM Treasury’s National Risk Assessment of Money Laundering and Terrorist Financing. I read that:

“The risk of criminals exploiting UK trusts to launder money is therefore assessed to be low” and that “there are no known cases of UK trusts being abused for terrorist financing”.

As both a member of the Society of Trust and Estate Practitioners and something of a self-professed fan of trusts as a family succession and asset management tool, this was music to my ears.

So I thought I’d share my joy by explaining, in simple terms, what a trust is and why you might think about using one.

The concept is very simple – a person (the settlor) wants to gift an asset to someone else (a beneficiary) but does so by giving it to someone they trust (a trustee) with instructions as to how it should be looked after on behalf of the beneficiaries. By doing this the settlor has managed to split the legal ownership from the beneficial ownership:

  • the trustee has the legal ownership, meaning that (subject to the rules created by the settlor in the trust deed) they retain control and decision making powers over the assets and the assets are, in most instances, ring-fenced from the beneficiaries’ personal assets;
  • the beneficiaries have the beneficial ownership, being the persons who stand to benefit from all the income and assets in the trust, albeit with the trustees controlling how and when that benefit passes to them.

There are all sorts of reasons why trusts are created, but some commonly encountered family situations include:

  • fear of divorce or family breakdown leading to the asset being lost;
  • fear of bankruptcy or poor financial decision making if a beneficiary is gifted an asset outright;
  • retaining flexibility over the destination of the gift (for example if further grandchildren are born they can benefit alongside existing ones);
  • retaining flexibility as to who benefits and when (for example funding university costs of beneficiaries one or two at a time);
  • retaining control and decision making over the asset given away generally (Mum and Dad know best!); and
  • dealing with assets during second marriages (spouse to be looked after during life, but assets ultimately pass to the settlor’s children).

Whilst a simple concept, the tax treatment of trusts is anything but simple, and professional advice is a must in order for them to operate at their best. Get your planning right, and use of a trust could be a fantastic part of your Inheritance, Income and Capital Gains Tax planning as well as providing an ideal vehicle for your family’s business or asset succession plans.

To find out more about how a family trust might be relevant to your circumstances, or for advice or guidance about a trust already in place, contact your usual UHY adviser or complete our online contact form here.