What are the advantages and disadvantages of a trust?
A trust is a good way of giving an inheritance to your family after you are gone, avoiding potential financial disasters, and managing assets. However, a Trust is not suitable for everyone, and before deciding to set one up, you should consider the pros and cons of doing so.
What is a trust?
A trust is a way of managing, controlling, and passing on assets such as investments, property, and cash.
A trust has three key players:
- The settlor: The person who establishes the trust for the benefit of the beneficiaries. The settlor hands over the property ownership to the trustee.
- The Trustee: This is the legal owner of the trust whose role is to manage the investments and assets on behalf of the beneficiaries. They have the power to buy, invest and sell property, and manage the trust responsibly.
- The Beneficiary: This is the person or people who benefit from the trust.
What are the types of trusts?
Types of trusts include the following:
- Bare trusts: The beneficiary can access the assets at any time when they turn 18 years old.
- Interest in possession trusts: The trustees must hand over all trust income as it arises to the beneficiary, discluding any expenses.
- Discretionary trusts: The trustees can make particular decisions about how the trust income can be used and can impose certain conditions such as how often payments can be made.
- Accumulation trusts: The trustees accumulate all trust income, add it to the capital and pay it out to the beneficiary.
- Mixed trusts: A mixed trust is a combination of two or more types of trusts.
- Settlor-interested trusts: In this type of trust, the settlor, their spouse, or a civil partner is a trust beneficiary.
What are the advantages of a trust?
There are many advantages of having a trust, but in order to fully reap the benefits, it is important that you choose the right trust that is suitable for your situation and that it is properly drafted by a professional.
For instance, the most obvious advantage of a will trust is that it can protect the interests of the settlor more and can lessen the chance of being challenged if disputed after death.
In addition, when someone puts assets in a trust such as property, they no longer own that property personally. Therefore, the value of those assets may not be counted towards the Inheritance Tax bill after they die. A trust is designed to avoid probate since the trust is a separate legal entity from the individual that created it, and if appropriately drafted, there is no need for probate to happen.
In this sense, a trust is separate from those assets that make up part of an estate and a way of protecting and controlling the assets to support the interests of the beneficiaries.
Depending on the type of trust, there may be tax relief benefits, however, this is dependent on how the trust is set up.
A trust is also a good way of protecting those who are too young or vulnerable to handle their own affairs or assets themselves.
What are the disadvantages of a trust?
There are a few disadvantages of having a trust such as the responsibilities that are placed on the trustee can be complex and burdensome. However, if they are aware of their duties and seek the right legal advice, then this should not cause any problems. The issues arise when a trustee is unaware of their legal responsibilities and then acts negligently as a result.
Trustees are also responsible for managing the trust including paying tax on income earned by the assets held in the trust. This places obligations on them to understand tax laws and to file tax returns correctly.
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