Can you explain trust funds to me?

the_commander

Hi all, I keep hearing about trust funds. Can someone explain to me exactly what they are and their benefits?

Thanks

DocProc

In common law legal systems, a Trust is an arrangement whereby property (including real, tangible and intangible) is managed by one or more persons or together with an organisation for the benefit of another.

A trust is created by a Settlor, who entrusts some or all of his or her property to people of his choice (the Trustees).

The Trustees hold legal title to the Trust property. However, they are obliged to hold the Trust property for the benefit of one or more individuals or organizations (the Beneficiary).

The Beneficiary of the Trust is usually specified by the Settlor and it is the Beneficiary who holds equitable title.

The Trustees owe a fiduciary duty to the Beneficiary, who is the "beneficial" owner of the Trust property.

The Trust is governed by the terms of the Trust Document. This is usually in written down form and also in Deed form. It is also governed by local law. It might well be referred to as The Trust Deed.

A Trust Fund is usually a Cash Fund. However, it may be a fund where the assets, which it holds, are in financial instruments, such as shares or bonds, which are realisable into cash form.

Property of any sort can be held on trust. The uses of trusts are many and varied. Trusts can be created during a person's life (usually by a Trust Instrument) or after death in a Will

You can read more about Trusts and their purposes at http://en.wikipedia.org/wiki/Trust_law

the_commander

Thanks Doc, I still am a bit unsure what circumstances a trust would be beneficial.

DocProc

Perhaps the most frequent use of a Trust might be to reduce taxation.

eg, Inheritance Tax. Here the Trust would usually be created within the terms of a Will immediately after someone's death.

A Spendthrift Trust is a trust put into place for the benefit of a person who is unable to control their spending. It gives the trustee the power to decide how the trust funds may be spent for the benefit of the beneficiary.

You might feel that someone like say, Paris Hilton, could find herself on the beneficiary end of one of these.

Instead of the term 'Trust Fund', you might get your head round it better, if you refer to the term as the Trust's Funds.

A Trust is merely ''an arrangement'. This arrangement can be written down on paper and it usually is. If it is written down on paper in the form of a Deed, then you might refer to the document as a Deed of Arrangement. Thus a Trust can usually have a Deed of Arrangement.

Inside this document, if it is written up properly, would be the definitions of what type of funds it can hold and how and what they are to be used for.

I'm not sure why you are interested in the term 'Trust Funds'?

Do you have a requirement to save a lot of tax? If so, then what sort of tax?

The sort of Trust written up to save Paris Hilton from herself, might not be the best thing for you? Agreed?

Anyhow, by now, I think you should be getting the idea of what they can be for and waht they are all about.

Did you go down to the bottom of the Wiki page on my link above? It mentions all sorts of trusts, including Unit Trusts.

Reaper

Maybe a simple example will help...

You might want to put money aside for your children when they reached 18. By putting it in a trust they can't rush out and spend it. With some types of trusts they might be allowed to get to it early if the trustees (those looking after it) felt the money was for a good purpose.

By putting it in trust rather than waiting and giving it as a gift as 18 there are tax advantages. In particular Inheritance Tax should you die before they reach 18. It may also get less tax on the interest (though my knowledge of tax law is weak so double check that!)

The government set up a special form of savings in trust for children called the "Child Trust Fund" - it even contributes to them. Read about that here.

the_commander

Thanks for the replies guys. Basically I was thinking about retirement. Could I put all my savings into a trust fund that can pay out to me whenever I need it? I am a bit miffed by the fact that I will be means tested, and because of my hard earned savings will receive naff all benefit.

Am I barking up the wrong tree here?

Thanks

Reaper

Yes. While I don't know the means testing rules when you put something in trust you are giving it to the recipient while restricting their access to it in some way. In this case you give it to yourself so it achieves nothing.

I doubt means testing can be avoided that easily or everybody would be doing it.

There was a big debate about means testing and pensions. The government is desperately keen for people to sort out their own pensions and the investigation into it recommended no form of means testing for state pension & benefits otherwise people wonder whether it is worth it when their state benefits reduce as they save for retirement. Unfortunately Brown balked at the bill and insisted on means testing to save money. Bad decision.

the_commander

Very bad decision!! I have heard that I need a pension pot of £50,000 to equate to a state pension!!! Result.... I am enjoying my cash now!

iamesbo

Reaper wrote: »

Yes. While I don't know the means testing rules when you put something in trust you are giving it to the recipient while restricting their access to it in some way. In this case you give it to yourself so it achieves nothing.

I doubt means testing can be avoided that easily or everybody would be doing it.

There was a big debate about means testing and pensions. The government is desperately keen for people to sort out their own pensions and the investigation into it recommended no form of means testing for state pension & benefits otherwise people wonder whether it is worth it when their state benefits reduce as they save for retirement. Unfortunately Brown balked at the bill and insisted on means testing to save money. Bad decision.

And one wonder how much cash such rules deprive the banks of at time like this
when they really need it? After all you might as well stuff it under the mattress rather than hand it all over to the government.
There is no incentive for people to save whatsoever, infact as the rules are you might as well blow the lot and live on credit, seems like that's what most people did and it seems like that's why we are in the finiancial mess we are in now.

So in reality means testing does not save money it just means people either don't save or simply do not save in a bank ( so they can lose the lot!!).

Could the OP but his money into a pension scheme?
I think that only works for the rich with piles of money, whilst the less well off have their hard earned saving confiscated a rate more penal than billionaires pay (who actucally won't pay any tax anyway!!)