Trusts & Settlements

Settlement Trusts, also known as structured settlement trusts or special needs trusts, are legal arrangements created to manage and protect the financial assets of individuals who have received a settlement or award in a lawsuit or legal dispute.

These trusts are typically established to provide for the long-term financial needs of individuals with disabilities, special needs, or who are unable to manage their own finances.

The primary purpose of a settlement trust is to ensure that the awarded funds are used to support the beneficiary’s ongoing medical, living, and other essential expenses without jeopardising their eligibility for government benefits, such as Medicaid or Supplemental Security Income (SSI).

By placing the funds in a trust, the beneficiary’s access to government benefits is preserved, as the assets held in the trust are not counted as personal assets when determining eligibility.

Settlement trusts are often managed by a trustee, who is responsible for making decisions about how the funds are invested, disbursed, and used to support the beneficiary’s needs. The trustee is legally obligated to act in the best interests of the beneficiary and follow the guidelines and restrictions outlined in the trust agreement.

These trusts can provide a variety of benefits, including tax advantages, asset protection, and professional management of funds. However, the specific rules and regulations surrounding settlement trusts may vary depending on the jurisdiction and the nature of the settlement.

It is important to consult with an attorney or financial advisor experienced in trust law to ensure compliance with applicable laws and to tailor the trust to the unique circumstances of the beneficiary.

A Bare Trust, also known as a simple trust or nominee trust, is a type of trust arrangement where the legal ownership of assets is held by a trustee, but the beneficiary has the absolute right to the assets and the income generated from them.

In a bare trust, the trustee has no active duties or responsibilities beyond holding and transferring the assets as instructed by the beneficiary.

The key characteristics of a Bare Trust include:

1. Beneficial Ownership: The beneficiary of a bare trust is considered the true owner of the assets held in the trust. The trustee holds the assets on behalf of the beneficiary but has no discretion or decision-making power over them.
2. No Trustee Discretion: Unlike other types of trusts, such as discretionary trusts, the trustee of a bare trust has no authority to make decisions regarding the assets or their use. The trustee must act solely based on the instructions and wishes of the beneficiary.
3. Transparent Relationship: The existence of a bare trust is typically known to all parties involved, including third parties. The beneficiary is often able to deal with the assets held in the trust as if they were their own, without needing the trustee’s consent or involvement.

Bare trusts are commonly used in situations where the legal ownership of assets needs to be separated from the beneficial ownership for various reasons, such as tax planning, and asset protection, or to facilitate the transfer of assets to minors or individuals who are unable to manage their own finances. However, it is important to note that the specific rules and regulations surrounding bare trusts may vary depending on the jurisdiction.

A Discretionary Trust is a type of trust arrangement in which the trustee has the power to decide how the trust’s income and assets are distributed among a group of beneficiaries. Unlike a bare trust where the beneficiary has an absolute right to the assets, in a discretionary trust, the trustee has discretion in determining how and when distributions are made.

Key characteristics of a discretionary trust include:

1. Trustee Discretion: The trustee has the authority to decide which beneficiaries will receive distributions from the trust, the amount of the distributions, and the timing of the distributions. The beneficiaries do not have an automatic entitlement to the trust assets or income.
2. Beneficiary Class: A discretionary trust typically defines a class of potential beneficiaries rather than specific individuals. This allows the trustee to have flexibility in choosing who will benefit from the trust based on the circumstances and needs of the beneficiaries.
3. Trust Deed: The terms and conditions of a discretionary trust are outlined in a legal document known as the trust deed. The trust deed sets out the powers and duties of the trustee, the criteria for making distributions, and any other relevant provisions.
4. Asset Protection: Discretionary trusts are often used for asset protection purposes, as the assets held in the trust are legally separate from the beneficiaries’ personal assets. This can provide a level of protection against creditors or legal claims.
5. Tax Planning: Discretionary trusts can be utilised for tax planning purposes. By distributing income and capital gains among multiple beneficiaries, the trustee can potentially take advantage of lower tax rates or utilise tax exemptions and deductions more effectively.

Discretionary trusts offer flexibility and control for trustees to manage the distribution of trust assets and income based on the individual circumstances and needs of the beneficiaries. However, it is important to consult with legal and tax professionals when setting up and administering a discretionary trust, as there may be specific legal and tax implications to consider.

The UK tax rules for discretionary trusts can be quite complex. Here are some key points to consider:

1. Income Tax: Discretionary trusts are subject to income tax on the income they receive. The tax rates applicable to trusts are generally higher than the rates for individuals. Additionally, the trust may have to pay tax on income that is accumulated or retained within the trust.
2. Capital Gains Tax: Discretionary trusts are also subject to capital gains tax (CGT) on any gains made when assets are sold or disposed of. The rate of CGT for trusts is typically higher than the rate for individuals.
3. Inheritance Tax: Discretionary trusts may be subject to inheritance tax (IHT) when assets are transferred into the trust, as well as when assets are distributed from the trust. However, there are certain IHT reliefs and exemptions available for trusts, such as the annual exemption and the nil-rate band.
4. Trustees’ Responsibilities: Trustees of discretionary trusts have a duty to manage the trust assets and ensure compliance with tax obligations. This includes filing annual tax returns, making tax payments, and keeping accurate records.
5. Tax Planning: Discretionary trusts can be used for tax planning purposes, such as reducing inheritance tax liability or providing for future generations. However, it is essential to seek professional advice to ensure that any tax planning strategies are within the bounds of the law.

It is important to note that tax rules and rates may change over time, so it is recommended to consult with a tax advisor or HM Revenue and Customs (HMRC) for up-to-date information and guidance on UK tax on discretionary trusts.

Tax planning for trusts involves strategies and considerations aimed at minimising tax liabilities and maximising tax advantages within the framework of trust structures. Here are some key aspects of tax planning for trusts:

1. Trust Taxation: Trusts are separate legal entities for tax purposes, and they may be subject to their own tax obligations. Depending on the jurisdiction and the type of trust, the trust may be subject to income tax, capital gains tax, and/or estate tax.
2. Distribution of Income: One tax planning strategy for trusts is to distribute income to beneficiaries who are in lower tax brackets. By doing so, the trust can potentially reduce its overall tax liability since the beneficiaries will pay tax on the distributed income at their own tax rates.
3. Accumulation of Income: In some cases, it may be more tax-efficient to accumulate income within the trust rather than distributing it to beneficiaries. This can be beneficial if the trust is subject to lower tax rates compared to the beneficiaries or if the beneficiaries are in higher tax brackets.
4. Tax Exemptions and Deductions: Trusts may be eligible for certain tax exemptions and deductions. It is important to understand the tax laws and regulations applicable to trusts in the relevant jurisdiction to identify and utilise these tax advantages effectively.
5. Estate Tax Planning: Trusts can also be used as part of estate planning to minimise estate tax liabilities. For example, assets transferred to certain types of trusts, such as irrevocable life insurance trusts or charitable remainder trusts, may be excluded from the taxable estate.
6. Trust Jurisdiction: The choice of trust jurisdiction can have significant tax implications. Different jurisdictions have different tax laws and regulations governing trusts. Some jurisdictions may offer more favourable tax treatment for trusts, such as lower tax rates or tax exemptions.
7. Professional Advice: Given the complexity of tax laws and regulations surrounding trusts, it is crucial to seek advice from qualified tax professionals with expertise in trust taxation. They can provide guidance on structuring the trust, optimising tax planning strategies, and ensuring compliance with tax laws.

It is important to note that tax planning should always be done within the bounds of the law, and any tax planning strategy should be assessed based on individual circumstances and the specific tax rules applicable in the relevant jurisdiction.

Speak to our team today to see how we can assist you with any trust & settlement issues.