What is a living trust and do I need one?
From trusty steed to trustee deed
What is a trust? Well, a good way to explain what it is and how it works is to go back in time to the Middle Ages. English Knights were called upon and encouraged to up sticks and travel all the way to the Holy Land on crusade which meant being away from home for months or even years. Who would look after their lands and estates while they were away? The answer was to appoint another noble as the steward of the estate who could be trusted to look after it pending the return of the heroic knight (assuming that he did actually return at all). That process was the birth of “the trust”.
Living trusts in the modern age
The basic principle behind the trust is the same as it was back in those heraldic times but, these days, you don’t have to do anything as dramatic as mounting your steed, sheathing your sword and heading off to join the crusades. Setting up a trust is something anyone can do.
A living trust, often called a “lifetime trust” or a “family trust”, is established by means of a document, or deed, which creates the trust whereupon it becomes a vehicle, or entity, to which the person setting up the trust (known as “the settlor”) can then transfer assets such as land, shares, works of art, jewellery or even cash. The assets thus transferred then become the property of the trust.
The trust must appoint trustees and name beneficiaries. The trustees are the people who administer and manage the trust and the beneficiaries are the people who may benefit from the trust. The settlor may be a trustee and also may be beneficiary. However, it is unwise for the settlor to be the sole trustee and the settlor cannot be the sole beneficiary, lest it be deemed a sham arrangement.
A trust is a well-established means of securing valuable family assets or ring-fencing them to protect them from, say, nursing home care costs, potential creditors or even the tax man.
Living trusts v Will
So, why not simply make a Will and ensure that all your assets are passed onto your heirs when you die? You certainly should have a Will and, if you don’t have one yet, you should seriously consider making one now. That said, waiting until you die to pass on your assets to your children does come with risks.
For example, many people leave their estate to their spouses and want it ultimately to go to their children when their spouse dies. However, there is nothing to stop your widowed spouse from re-marrying and then leaving or passing the assets to their new spouse.
Then there is the problem that none of us know what misfortune the future brings. A long term stay in a nursing home can take a huge chunk out of the family asset pool or even all the asset pool. Similarly, if someone is engaged in the business world and things turn sour, creditors could come looking for those precious family assets to settle debts.
In short, you should have a Will but the only way to ensure that valuable family assets are preserved is by transferring them into a trust.
Living trusts pros and cons
The obvious ‘pro’ of a living trust lies in its ability to preserve the family’s wealth. Once the settlor has transferred his or her assets to the trust, then the settlor no longer owns those assets; the trust owns them. So, even if the settlor goes bankrupt, those assets will be beyond the reach of any creditors.
Another “pro” is tax-planning. Having less assets in your estate when you die means a lower Inheritance Tax bill.
On the ‘con’ side, there are the living trust costs which mean the costs involved in setting up the trust and the ongoing costs of administering and maintaining the trust, especially if the settlor chooses to appoint a professional trustee. Over the years, trustees’ fees and various administrative costs and taxes can mount up to quite a lot of money. This is why it is of the utmost importance that anyone considering setting up a living or family trust seeks professional advice beforehand.
What are the disadvantages of a living trust? Well, there is one big potential problem with transferring your assets to a trust and that is that you no longer have those assets. It’s the same thing as giving them away in that title to those assets passes to the trustees. If a rainy day comes and you need those assets, well you’re out of luck. Of course, a settlor can be a beneficiary of the trust as stated above, but then the trustees cannot simply hand over all the trust assets to one beneficiary. That would be an actionable breach of trust for which the trustees could be liable.
Further, there are tax implications to setting up a trust and you would need to discuss these with your accountant or other tax adviser.
Do I need a living trust?
It really all depends upon your circumstances. If you're fortunate enough to be in a position to give away a portion of your assets while still having enough to meet your needs now and in the future, then a living trust is certainly something you should consider.
There are many types of living trust available and the best one for you depends upon the circumstances. It is something you should discuss with your lawyer. However, if you can afford it and you set it up the right way, then a living trust is an excellent way for you to become your family’s knight in shining armour.
For further information and trusted legal advice, get in touch with us at Carlsons Solicitors.