What is a trust fund?
Setting up a trust fund, sometimes referred to as a trust, means there is an arrangement where a person or group of people have control over assets or money.
Although trust funds are often seen as something only the very wealthy have, they’ve become a way for people who aren’t necessarily high earners to manage how assets are spent by another party.
The person who provides the assets is the settlor. They decide how the trust assets should be used, and who they go to - this is usually outlined in a legally-binding document called the ‘trust deed’.
Sometimes the settlor also stands to benefit from trust assets – this is called a ‘settlor-interested’ trust and has its own set of special tax rules.
Trustees legally decide how assets are to be used in a trust deed. They make sure the conditions in the trust deed are fulfilled.
The beneficiary, or beneficiaries, will receive the assets to spend or use as instructed by the trustees. Some parents leave money to their children to provide money for healthcare, to help them out if they’re buying a house, or to help them launch a career.
Essentially, it’s a way to ensure assets are spent wisely in case beneficiaries are deemed too young for financial responsibility, not of sound mind, or if they are incapacitated.
Trusts are also set up to pass on assets while the settlor is still alive instead of waiting to pass on an inheritance (although a ‘will trust’ can be created to pass on assets after death).
How to set up a trust fund
As the trust needs to be legally-binding, precise and clearly laid-out, you should ask a solicitor to set it up.
It can cost around £1,000 to set up a trust. A solicitor will make sure that the wording is exact and there’s no ambiguity, which could lead to costly issues further down the line.
Getting early access to a trust fund
If you want to access your trust fund early and access your money, you will need the co-operation of the trustees, and you’ll need to know the exact terms of the trust.
It’s likely that if you’re trying to access a trust set up by a family member, it’s a discretionary trust backed by a letter of wishes. This means that the trustees decide who gets what, and when, and they’re advised by a letter left by the settlor.
The letter of wishes isn’t legally-binding, but the trustees may use it as guidance - it’s a good way of letting the trustees know what the settlor wanted.
In short, you’ll need to petition the trustees and clearly explain your situation if you want any assets released early. No matter what the terms of the trust are, the trustees aren’t blocked from distributing the assets – although they can decide not to give you anything if they think your case isn’t strong enough.
If the trustees don’t release any money, you could take them to court – however, when the assets are released is ultimately a decision for the trustees. Courts recognise their powers, and very rarely agree to get involved.
The different types of trust funds
There are seven main different types of trust, and each one is different to meet the needs of settlors’ circumstances. However, they often have their own tax rules too, which also need to be considered. They have different levels of complexity, but should all be entered into with professional legal advice.
These are often set up for young people so they have access to the assets in a trust when they’re older. In England and Wales this comes into effect when they’re 18 or over, but 16 or over in Scotland.
These are usually set up for spouses or civil partners, which can then be used in times of need, such as payment for medical bills. In these circumstances, the settlor can get the benefits of the trusts as well as the beneficiary.
These are used if a trust is more complex than simply releasing capital to a beneficiary. Discretionary trusts decide when assets are paid out, how frequently, and any other rules to prevent reckless spending.
This means the trustees can add to the trust’s capital, but also have control over pay outs.
Interest in possession trusts
Aside from any incurred expenses, trustees must pass all the income to the beneficiaries when it becomes available.
This is a trust specifically for trustees who do not reside in the UK for tax reasons.
There are occasions where the rules for more than one type of trust are required, so mixed trusts are needed, along with their own tax rules.
Are trust funds taxed?
Different kinds of trusts, and trust incomes, have different rates of income tax, with some more complex than others. This is particularly true for trustees overseas.
Trusts can be affected by different types of tax, including:
- Income Tax: This tends to affect discretionary and accumulation trusts. Trustees must pay the standard tax rate on the first £1,000 of income. This changes if the settlor has more than one trust, with the standard rate band for each trust being £200 for up to five different trusts. If the trust income is above £1000 the tax rate changes to 38.1% for dividend-type incomes and 45% for all other incomes.
- Capital Gains Tax: If an asset has gained value, either taken from or put into a trust, this is the tax on the profit of the asset. The tax is paid by the settlor who is transferring the asset into the trust, or whomever is selling the asset to the trust. If the assets that have gained value are coming out of the trust, the trustees will pay the tax. There are, however, circumstances where the rules change, such as bare trusts when the beneficiary has received the assets.
- Inheritance Tax: Inheritance Tax is due when there are ‘exit charges’, which happen when the trust ends or assets are taken from a trust. Also, when assets are transferred into a trust Inheritance Tax is paid, as well as if the trust is involved in sorting out the estate of someone who has died. Inheritance tax is paid on the first decade that the trust was set up.
- Infographic: Parents and Christmas
- How do tax credits work?
- What is a trust fund?
- What is Inheritance Tax?
- Closing down a bank account after a death
- What is Marriage Tax Allowance?
- What happens if you don’t leave a will?
- Registering a death
- What happens to property after a divorce?
- Will a prenup protect me if I get a divorce?
- How much does a divorce cost?
- Looking after your credit score while you’re at university
- Guide to credit and debit card protection
- Cashless society and changing savings habits for kids
- Living and working on the UK Minimum Wage
- How to budget if you’re a single parent
- Infographic: Average Equifax Credit Scores across the UK
- How to budget at university
- Guide to sending money overseas
- How to budget for kids going back to school
- How the Budget 2018 will affect your earning, spending and saving
- Infographic: How much does it cost to get married?
- What is the workplace pension?
- Infographic: Millennials and money - What kind of side hustles are they doing?
- Budgeting for the holiday season - gifts
- Budgeting for a wedding
- How much rent can I afford?
- Pension tools and resources
- Planning for early retirement
- Downsizing your home
- What will my state pension be?
- Budgeting for a baby
- Budgeting for a holiday
- An introduction to investments
- Budgeting for a funeral
- Financial planning for parents
- How transferring pensions works
- Helping elderly parents manage their money
- Budgeting for school holidays
- Looking after your financial documents
- New Year, new start to your finances
- How to avoid overspending on special occasions
- Financial Jargon Buster
- Getting Financial Help – The Best Online Resources
- Explaining the Different Types of Savings Accounts
- Understanding Payment Cards
- Money Saving Strategies – Tips on How to Save
- How to Budget Your Finances