Lawyers often use terms like “Trusts” without properly explaining to their clients what these are.
The purpose of this note is to give you a brief introduction to what “Trusts” are about and an explanation of some of the terms lawyers often use – “Trustee”, “Beneficiary”, “Settlor”, “Discretionary Trust”, “Letter of Wishes” and so on.
By its very nature this note omits what might be key information particular to your circumstances. You should not act or omit to act without first taking specific legal advice on your position.
A trust is a legal relationship created when one or more persons (Trustees) hold assets for the benefit of one or more other persons (Beneficiaries). The person who sets up the trust is known as the Settlor. The Settlor can be one of the trustees and even a beneficiary.
There are various types of Trusts and they are not just tools for the “super rich”. Trusts ought to play a part in the tax and succession planning of most business people.
Most people are in fact party to some form of trust. When you buy a home with another person, you may not realise it but the law creates a trust. You own the legal title to the home as trustees for yourselves. You are both trustees and beneficiaries. The nature of that trust is determined by whether you hold the house for yourself as “joint tenants” or “tenants in common”. The meaning of these terms is outside the scope of this note but I mention it to point out how widespread trusts are.
Other forms of trust include situations where you might have a nominee holding an asset for you (e.g. shares in a company) because you do not want the world to know that you are the true owner of the asset. This is known as a bare trust.
In wealth and tax planning the most common form of trust used is the Discretionary Trust. This is where there is a class (or list) of beneficiaries and no set rules in the trust document as to who should get what. These trusts are often accompanied by a letter (Letter of Wishes) from the person setting up the trust to the trustees. The Letter of Wishes sets out what the settlor would like the trustees to do but it is not legally binding upon them. These structures are adopted for tax reasons but it does make picking your trustees an important task.
I regularly advise clients on the use of trusts as a part of succession and tax planning advice. Contact us, find out how we can help you