Trusts have a reputation problem. Mention them in conversation, and people assume you’re talking about tax avoidance schemes for the wealthy, complicated legal arrangements that only millionaires need to worry about, or dusty Victorian-era inheritance planning that’s no longer relevant.
That’s an incomplete picture.
Trusts are practical tools that ordinary people use to solve real problems. You don’t need to be wealthy to benefit from one. You just need to have assets you want to protect and specific concerns about how those assets should be managed or distributed.
This guide walks through the five most common reasons people set up trusts, with real examples of when they make sense and when they don’t.
What Is a Trust?
Before we get to the reasons, let’s clear up what a trust actually is. In simple terms, a trust is a legal arrangement where you transfer assets to someone else (the trustees) to manage for the benefit of specific people (the beneficiaries).
Three key players are involved:
- The settlor: That’s you. The person who sets up the trust and transfers assets into it.
- The trustees: The people you appoint to manage the assets according to your instructions. This could be family members, friends, or professionals like solicitors.
- The beneficiaries: The people who benefit from the trust. This could be your children, spouse, grandchildren, or anyone else you choose.
Once assets go into a trust, you no longer own them personally – the trustees become the legal owners and must follow the trust rules.
This can ring-fence assets and add control in ways simple ownership doesn’t.
1. Protecting Assets for Children Who Aren’t Ready
One of the most common reasons people set up trusts is to leave money or property to children while controlling when and how they get it. Handing an 18-year-old a six-figure inheritance the moment they reach adulthood is a recipe for disaster in many families.
The Problem With Giving Everything at 18
Under a basic bare trust, children get full control of their inheritance at 18 (16 in Scotland). That might be fine if you’re leaving them £5,000. It’s less fine if you’re leaving them £200,000 and they’re still at university with no real-world financial experience.
A discretionary trust gives trustees wide discretion over when and how money is paid out, within the rules you set. You can set guidelines in your trust deed about what you want to happen, but the trustees make the final decisions based on the beneficiary’s circumstances at the time.
How Release Schedules Work
Many parents structure trusts to release funds in stages. Here’s a common pattern:
- Age 21: Access to a portion for university costs or a house deposit
- Age 25: Another portion once they’re more established in their career
- Age 30: The final amount when they’ve had time to mature financially
Alternatively, you might give trustees discretion to release funds only for specific purposes, such as education, starting a business, or buying a home.
Protection Beyond Age
A trust can make it harder for creditors or ex-partners to access the inheritance directly, but it’s not absolute and depends on the trust terms and circumstances.
2. Second Marriages and Blended Families
If you’re in a second (or third, fourth, etc.) marriage and have children from a previous relationship, trusts can solve an otherwise impossible problem. You may want to make sure your current spouse is looked after if you die first, but you also want to ensure your children eventually inherit your assets.
The Risk of Leaving Everything to Your Spouse
Without a trust, the standard solution is to leave everything to your spouse. But then you’re relying on them to pass it to your children when they die.
What if they remarry? What if they change their will? What if their new partner inherits everything instead of your kids?
How a Life Interest Trust Works
A life-interest trust (also called an interest-in-possession trust) created in your will helps solve this.
Your spouse gets the right to live in your property or receive income from your assets for the rest of their life, but they don’t own them outright. When they die, the assets pass to your children as originally intended.
The trust deed sets out exactly what your spouse can and can’t do:
- They can: Live in the property, receive rental income from assets, get dividends from investments
- They usually can’t: Treat the capital as their own; whether the property can be sold (for example to downsize) depends on the trust terms
This protects everyone’s interests. Your spouse isn’t left destitute, and your children aren’t cut out of their inheritance. It’s a fair compromise that gives certainty to both sides of the family.
3. Inheritance Tax Planning
Inheritance tax sits at 40% on everything above £325,000 (plus an additional £175,000 if you’re leaving your home to direct descendants). (The residence nil-rate band can taper away for estates over £2m, and spouse/civil-partner allowances can change the outcome.)
Trusts are sometimes used in inheritance tax planning, but the tax treatment is complex and not always beneficial. They’re not the magic bullet they used to be.
How Discretionary Trusts Are Taxed
If you set up a discretionary trust during your lifetime and transfer assets into it, this is called a chargeable lifetime transfer.
The tax treatment works like this: If you transfer up to £325,000 (and you haven’t made other chargeable transfers in the previous seven years), there’s no immediate tax charge. If you transfer more than £325,000, there’s an immediate inheritance tax charge of 20% on the excess – and if you (the settlor) pay the tax personally, the effective rate can be higher because of ‘grossing up’.
But that’s not the end of it. The trust then faces:
- 10-year anniversary charges: Up to 6% every 10 years on value above the available nil-rate band
- Exit charges: When assets are distributed from the trust to beneficiaries
- Additional charges if you die within seven years: The transfer gets recalculated at 40% (with credit for any tax already paid)
When IHT Planning With Trusts Makes Sense
The maths only works in specific situations. If you’re transferring assets that will grow substantially in value, getting them out of your estate early can save tax, even with the trust charges. If you’re using business property relief or agricultural property relief to reduce the initial transfer value, trusts can be more effective.
But for most people with straightforward estates, simpler IHT planning methods (like making outright gifts to individuals, which become fully exempt after seven years with no ongoing charges) are more tax-efficient than using discretionary trusts.
Critical Warning
This is genuinely complex. Get it wrong and you could end up paying more tax, not less. Don’t set up a trust for inheritance tax planning without proper professional advice from a specialist who understands the current rules. Especially true with the new agricultural and business property relief rules incoming.
4. Caring for Vulnerable Family Members
If you have a child or relative who can’t manage their own affairs due to disability, illness, or vulnerability, a trust ensures they’re looked after properly without giving them direct access to money they can’t handle.
Who This Helps
This could apply to several situations:
- A child with learning disabilities who will never be able to manage finances independently
- An adult relative with mental health issues who struggles with money management
- Someone with a brain injury or degenerative condition that affects their capacity
- A beneficiary who might be exploited or taken advantage of if they had direct access to funds
How Vulnerable Person Trusts Work
A discretionary trust for vulnerable beneficiaries gives trustees the power to use trust funds for the beneficiary’s benefit without relinquishing control.
The trustees can pay for care, accommodation, medical expenses, or quality-of-life improvements, but the beneficiary never receives a lump sum that they might spend unwisely, or that might make them a target for exploitation.
These trusts also protect means-tested benefits. If the vulnerable person receives disability benefits or other state support, a substantial inheritance could disqualify them.
But if assets are held in a properly structured trust, they don’t count as the beneficiary’s own resources. This can help avoid disrupting means-tested benefits, but it depends on the benefit rules and the person’s circumstances.
Tax Advantages and Registration
Vulnerable person trusts can get special tax treatment, which means the tax is usually much lower. For someone on disability benefits with minimal other income, this often results in little or no tax to pay.
However, this doesn’t happen automatically; the trustees need to make a claim to HMRC and meet the qualifying conditions.
You can get free advice on this from charities such as Scope.
5. Avoiding Probate and Speeding Up Distribution
When someone dies, their estate usually has to go through probate before anything can be distributed.
This process can take months, sometimes over a year if the estate is complex or there are disputes. During probate, access to many assets can be delayed, leaving families short of cash.
Why Probate Causes Problems
Probate isn’t just slow. It creates real hardship for families:
- Bills and mortgage payments still need to be paid, but bank accounts are frozen
- Funeral costs need to be covered immediately, but there’s no access to the deceased’s money
- The surviving spouse might struggle to pay living expenses while waiting for probate to complete
- Business interests or rental properties can’t be sold or transferred until probate is granted
How Trusts Bypass Probate
Assets held in trust bypass probate entirely because they’re not part of the deceased’s estate. They already belong to the trust, and the trustees can continue managing them or distribute them to beneficiaries in accordance with the trust terms, regardless of what’s happening with the rest of the estate.
Life insurance policies written in trust are a perfect example. If you die with a £500,000 life insurance policy in your own name, that money goes into your estate, gets caught up in probate, and might be subject to inheritance tax. If you write the policy in trust from the start:
- The money goes directly to the beneficiaries outside your estate
- They can access it often much faster (sometimes in weeks rather than months), depending on the insurer
- It doesn’t count towards your inheritance tax liability
- It doesn’t get delayed by probate
This same principle works for other assets. Investment portfolios, rental properties, or business interests can all be held in trust to ensure smooth, quick transfer when you die.
When Trusts Don’t Usually Make Sense
Trusts aren’t the right answer for everyone. Here’s when they’re probably not worth the hassle:
- Your estate is well below the inheritance tax threshold: Many couples pay no IHT on the first death due to spouse exemption; IHT risk is often assessed on the second death and depends on the combined estate.
- Your family situation is straightforward: If you’re married with adult children, everyone gets along, and you’re happy for your spouse to inherit everything with no conditions, you don’t need a trust.
- You might need the money later: Once you put assets into a trust, you’ve given them away. If you might need access to those assets for care costs or living expenses, don’t put them in a trust.
- The amounts are small: Setting up a trust costs money (typically £500-£1,500 in legal fees), and trustees have ongoing admin responsibilities. For a £20,000 inheritance, the costs probably aren’t justified.
How Double Point Can Help
Trusts involve complex tax rules that vary depending on the type of trust and its structure. Don’t take any risks with them; it could totally derail your plans or cost you time, money, and stress. Professional advice is extremely sensible.
At Double Point, we help trustees handle their tax compliance, from annual trust tax returns to capital gains calculations and reporting to HMRC.
If you’re thinking about setting up a trust or you’re already a trustee dealing with tax obligations, book a consultation with Double Point today. We’ll make sure you understand what’s required and keep everything compliant.