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Why use a trust?

Setting up a trust fund can be useful for generational wealth preservation, if you would like someone to manage your money for you or if you wish to provide for a vulnerable or young person now and into the future.

When wealth and assets are put into trust they are reserved for a particular beneficiary, so they are protected and can’t be spent or disposed of.

Trusts can also be used as an effective estate planning tool to reduce Inheritance Tax (IHT) and can help your beneficiaries receive more of your assets and wealth when you pass away.

How can trusts be used?

Trusts can be used in a number of different ways. For example:

• Grandparents may wish to put a fixed sum of money away for grandchildren so they can fund a university education or have a ready-made deposit to buy a home.
• When someone divorces and then remarries, they may wish to set up a trust to ensure their children will benefit from particular assets and wealth.
• When a vulnerable person needs looking after, a trust can be set up so that any inheritance or compensation sum is managed for their benefit, to keep them financially secure. If set up correctly, they may still be able to retain means-tested benefits.

Who’s who in a trust?

Settlor: The person who sets up the trust; the original owner of the assets. On setting up a trust the settlor transfers legal ownership of the assets to the trustee(s).

Trustee: A person (or group of people) chosen by the settlor to hold the assets and administer them on behalf of, and for the benefit of, the beneficiary. Trustees must agree to their appointment and can be held liable if their actions breach trust rules. 

Beneficiary: The person (or group of people) chosen by the settlor to benefit from the assets held in the fund. The settlor may also be named as a beneficiary (a settlor-interested trust) if that is the case. Careful drafting of the trust document will be needed to deal with any possible conflicts of interest when a settlor is also named as either trustee and/or beneficiary.

Types of trust

There are a number of different types of trust which can be set up in England and Wales, including:

• Bare trusts: The simplest form of trust. A bare trust is straightforward to administer and relatively cost-effective. Assets pass to the beneficiary on the date of their 18th birthday.
• Discretionary trusts: A more flexible option which allows trustees to decide how and when assets and income from a trust are distributed.
• Life interest trust: Also known as ‘interest in possession’ trusts or ‘fixed interest’ trusts, these are a type of trust in which the beneficiary is entitled to net income from a fund either for life or for a fixed period of time. This can also include a ‘right to occupy’ a property for life.  
• Will trusts: can help you protect your loved ones and choose how your property and assets are distributed on your death.
• Spousal bypass trust: Set up separately from your pension scheme, a spousal bypass trust can protect your death benefits from Inheritance Tax liability on the death of your spouse or civil partner.
• Trusts for vulnerable beneficiaries: For children and disabled people.
• Personal injury trusts: For individuals who have received large compensation sums, typically as a result of suffering life-changing injuries in an accident.