Setting up a trust can be an excellent way to plan for the future. Before you do so, however, you need to understand all of the terms and phrases used within this area of law. Here, our experts explain exactly what the settlor of a trust is.
In the realm of estate planning and asset management, trusts are powerful tools that allow individuals to protect their assets and ensure their loved ones are cared for. Trusts can seem a bit confusing at first, but gaining an understanding of them is crucial for effective future planning.
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One of the pivotal roles in the establishment and functioning of a trust is that of the settlor. But who is the settlor of a trust, and what does their role entail?
Below, we explain who the settlor of a trust is, their roles and responsibilities, and the potential implications of acting in this capacity. If you have any questions we have not answered, our expert Wills, Trusts & Probate solicitors are happy to speak to you regarding your query and provide the legal services you need. You can contact us by completing the enquiry form below or by calling 0151 666 9090.
What Is a Trust?
A trust is a legal arrangement where assets – such as money, investments, and property – are placed under the management of a trustee for the benefit of a third party, known as the beneficiary.
Trusts are established for various reasons, including to control and protect family assets; safeguard a beneficiary’s interests when they are too young or unable to manage their affairs; and distribute assets, either during the settlor’s lifetime or after their death.
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The key function of a trust is that it allows the separation of legal ownership and beneficial interest: the trust becomes the legal owner with trustees who have a duty to manage the trust property for the beneficiary who holds the beneficial interest.
These arrangements are formalised in a legally binding document known as the ‘trust deed,’ which outlines the trust’s terms and conditions, and the parties involved. Despite their perceived complexity, trusts can offer considerable benefits, depending on individual circumstances and requirements.
Who Is the Settlor of a Trust?
The settlor of a trust, sometimes referred to as the “grantor,” “donor,” or “trustor,” is the individual who creates the trust. The settlor transfers their own property or assets into the trust, initiating the trust arrangement.
In establishing the trust, the settlor decides and outlines the terms of the trust, including the identification of trustees and beneficiaries. The settlor may choose more than one beneficiary and must identify at least one trustee. These terms are usually formally agreed in a legal document known as the trust deed.
It is worth noting that the settlor’s role is fundamental in setting up the trust, but limited after the fact. Once the trust is established and the assets are transferred to the trust, the settlor typically steps back, allowing the trustees to manage the assets on behalf of the beneficiaries. This is particularly important to the management of a discretionary trust, in which the trustees have some degree of control over how the trust’s assets are distributed.
However, in certain trusts, the settlor might retain some powers or rights, such as the ability to replace trustees or modify the terms of the trust. In all cases, trusts must be managed according to the settlor’s wishes.
Who Can Be A Settlor?
Generally speaking, a valid trust can be created by anyone who is over the age of 18 and of sound mental capacity. There are a number of different trusts that can be created by a settlor, each applicable to certain scenarios. There may be special tax rules for certain trusts, which is one reason why a settlor may choose a particular trust structure.
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Every trust must have three roles filled: the settlor, the trustee, and the beneficiary.
Can A Settlor Be A Trustee?
Yes, a settlor can serve as a trustee. This arrangement is quite common, particularly in cases such as when a married couple creates a trust.
Being both the settlor and trustee allows for the settlor to maintain control and oversight of the assets held within the trust. Settlors may do this as part of their estate plan because trusts are taxed differently, or because they wish to maintain some degree of control over their assets after they pass away.
However, it is important to remember in this case, as a trustee, the settlor has a fiduciary duty to act in the best interests of the beneficiaries of the trust. You can read more about trustees and their role in our guide to the differences between executors and trustees.
Can A Settlor Be A Beneficiary?
Yes, the settlor of a trust can also be a beneficiary. However, this situation, known as a “settlor-interested” trust, can have significant tax implications and requires careful consideration.
These specific tax rules relate to the three main taxes: Income Tax, Capital Gains Tax, and Inheritance Tax. In the context of a “settlor-interested” trust:
- Income Tax: The entire income of the trust is taxable in the hands of the settlor, even if the settlor does not actually receive that income. This means that the settlor needs to pay income tax on any income the trust generates.
- Capital Gains Tax: If the settlor adds assets to a “settlor-interested’ trust, they will have an immediate chargeable gain, leading to possible Capital Gains Tax liabilities at the time of transferring assets into the trust.
- Inheritance Tax: If the settlor can benefit from the trust property, it is seen as a “gift with reservation of benefit”. This means the trust assets will be considered part of the settlor’s estate upon their death. Therefore, the value of the trust fund will still be evaluated as part of the settlor’s estate for Inheritance Tax purposes.
The impact of these rules can vary based on individual circumstances, including the types of assets placed in the trust and their value. As a result, anyone considering establishing a “settlor-interested” trust should consult with a legal professional to understand its implications, particularly as it relates to ongoing tax affairs.
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