Trust funds are an important tool for transferring and managing wealth in the UK. With some 149,000 trust funds in operation up to 2018 according to reports.
As such, trust funds can be used to provide financial support to children, grandchildren and other beneficiaries in a variety of ways, including through regular payments or distributions upon specific events. But how do trust funds pay out the assets or income?
As solicitors with decades of experience concerning Wills and Trusts in South Wales, how a trust fund pays out is what we’re going to outline in this article.
The law regarding trust funds and Wills is the same for England and Wales.
Of the two main types, a bare/absolute trust pays out upon request to the trustees, provided the beneficiary is over 18. If all provisions are satisfied it should be granted. A discretionary trust relies wholly on the discretion of the trustees, acting in the best interests of the beneficiaries.
Sounds simple, but there are nuances to take into account with this.
Trust funds payout according to how they were set up
In general, trust funds payout …or distribute assets and/or income according to the terms specified by their creator.
The creator refers to the person who originally set up and funded the trust.
For information on setting up a trust fund refer to our previous article for a quick lesson on the steps to set one up and where we answer common questions.
If you are to be the trustee, and the beneficiary is under 18, then read our article focusing on this area – which also helps if the trust is to be secret.
How do trust funds payout?
The terms of a trust fund will be laid out in the trust deed, and they can either be very specific or relatively general. Let’s just recap on what a trust deed is.
What is a trust deed?
Also known as a Declaration of Trust in the UK, a Deed of Trust is a legal and binding document sets out how ownership of a property or asset is divided. It is often utilised by ‘tenants in common.’ In which different parties have paid different amounts into a property purchase.
So how do trust funds payout? …
For example – A trust might specify that assets are to be used to provide an income for a beneficiary (or beneficiaries) until they reach the age of say 25, at which point the assets would then be distributed to them equally – or in some cases – unequally based again on set criteria and circumstances.
Who does a trust fund pays out to?
Trust funds can also be set up to provide for a specific beneficiary, such as a grandchild.
In this case, the trust fund would typically include provisions for how the assets are to be distributed.
For example – when the beneficiary reaches a certain age or graduates from University. Or if they experience some life event deemed significant by their grandparents.
The trust fund may provide for them to receive a lump sum payment at a given point in time, again based on criteria set out in the details of the terms.
There are several different ways that trust funds can distribute payments to their beneficiaries – depending on which type of fund it is.
Trust funds in the UK typically fall into one of two categories – a bare (or absolute) trust, or a discretionary trust. We’ll go into both, and how a beneficiary can claim assets or income from them.
“There are several different ways that trust funds can distribute payments to their beneficiaries.”
Bare trust
A bare trust is a type of trust fund that provides for the immediate and automatic payout of assets or income to the beneficiary …upon reaching a certain age or condition, such as the age of 18, or graduation from university.
How do you claim from a bare trust fund?
How a beneficiary claims from a bare trust
In the vast majority of cases, the beneficiary, upon meeting any criteria can simply make a written request to the trustee, which will typically involve completing and submitting a form. The trustee will then pay out the money as soon as possible, usually within 28 days.
Provided all or any criteria have been met, the trustee is obligated to transfer over the money or assets to the beneficiary.
If the trustee refuses, the beneficiary can take the matter to court.
Discretionary trust
A discretionary trust gives the trustees more power over how and when money is paid out, as well as who gets what.
This type of trust is often used by people who want to make sure their money goes to certain people, under specific conditions or times.
Ultimately, the trustee has discretion over when and how to pay out assets or income to beneficiaries.
This means that, unlike with a fixed trust, the trustee can decide not to pay out anything at all if they don’t think it’s in the best interests of the beneficiaries. However, the trustee must always be seen to be acting in good faith when making decisions, with the beneficiary’s best interests in mind.
However, beneficiaries do have the right to request status and information about the trust’s investments and finances in the form of limited documentation.
“the trustee has discretion over when and how to pay out assets or income.”
How a beneficiary claims from a discretionary trust
For the most part, the beneficiary has no automatic right to any of the funds or assets managed by the trustee in a discretionary trust.
Essentially, the beneficiary has the right to ask for funds but does not have automatic rights to receive them.
They may first need to meet any, and all criteria (if any) laid out in terms of entitlement. And/or hope that the trustee agrees that handing over assets or income is in the best interests of the beneficiary.
As part of the decision process, the trustees may request additional information regarding the reasons behind the request. This request is made solely to satisfy any provisions of how and when the money is to be used. The reasons are then set against the criteria that may need to be met – as per the trust deeds.
The trustees must legally consider any request made from a beneficiary, and must all agree on either acceptance or refusal.
In the event of a refusal, trustees are not obliged to give reasons for the decision. They should, however, record the decision, as well as maintain proper trust accounts.
“The trustees must legally consider any request made from a beneficiary”
Trustee decisions can be challenged
If it can be demonstrated that the trustees have not exercised proper discretion or acted in the interests of the beneficiary, or acted impartially. Then the beneficiary (upon official refusal) may be in a position to initiate a claim to have one or more trustees removed from the position.
For example – If it can be shown that the trustee(s) have not taken account of important elements of the request, or did not act impartially. Perhaps if they have some conflict of interest or personal grievance against the beneficiary.
Complexities in trust funds
Trusts sound simple, and for the most part, they are and run relatively smoothly. But on occasion, they can be complicated.
This can arise when beneficiaries are unaware of exactly what they’re entitled to. Or on occasions when there are personal conflicts between the beneficiary and the trustee(s).
This is why, when a trust fund is set up, it’s crucial to select those that have a sensible approach, and can remain impartial and act for the benefit of the eventual recipient.
How do trust funds payout in the UK? – Next steps
You probably arrived here either because you’re wondering what type of fund to set up, considering trustees for a fund, or are the beneficiary and need to understand how to claim.
Whichever party you are, we can provide you with the information required to understand your rights concerning the law for trust funds, and if and how you can make a claim or understand your legal status.
So contact us today, and speak to our dedicated team who work with trust funds daily, we can help.
