Trusts in Estate Planning: A Complete Guide

A trust is a legal arrangement where one or more people hold assets for the benefit of others. Ownership is split in two: the legal owner who manages the asset, and the people who are entitled to benefit from it. That split is the whole point. It lets someone you trust manage money or property on behalf of people who cannot, or should not, manage it themselves yet.

There are three roles. The settlor is the person who puts assets into the trust, usually by gift during their lifetime or through their will on death. The trustees are the people who legally own and manage the trust assets, and who are bound to act in the beneficiaries’ interests under the terms the settlor set. The beneficiaries are the people who can benefit from the trust, whether through income, capital, or the use of an asset such as a home. One person can occupy more than one role, and most trusts have more than one trustee so that decisions are shared and the arrangement survives if one trustee dies.

The terms of the trust are set out in a trust deed, or in the will where the trust is created on death. The deed records what the trustees can do, who benefits and on what terms, and when the trust ends. Once assets are properly transferred in, they are no longer owned by the settlor personally. That change of ownership is what makes a trust effective, and also what makes it irreversible in most cases, so it should never be entered into without specialist advice.

A trust earns its place when you need control that a simple gift or a straightforward will cannot give you. The clearest case is timing and conditions: you want to leave money to children or grandchildren, but not have it land in their hands as a lump sum the moment they turn 18. A trust lets you set when capital is released, or leave that judgement to trustees who know the family.

Trusts also protect people who cannot look after money themselves. For a young beneficiary, or a relative who is vulnerable through disability or illness, a trust keeps assets managed by responsible adults rather than handed over outright. There are specific trust rules for disabled and vulnerable beneficiaries that can also improve the tax position, which a specialist should assess case by case.

The other common reason is protection from events outside the family’s control. Assets held in trust for a beneficiary are generally harder for a divorcing spouse or a trustee in bankruptcy to reach than money the beneficiary owns outright, though this is never absolute and depends heavily on how and when the trust was set up. Second marriages and blended families are a frequent driver too: a trust can let a surviving spouse live in or draw income from an asset for life, while guaranteeing the capital eventually passes to the children of an earlier relationship.

Several kinds of trust exist, and they behave very differently for both control and tax. The right one depends on what you are trying to achieve, so the descriptions below are a starting point for a conversation with a specialist, not a recommendation.

Most lifetime discretionary trusts, and many interest in possession trusts created today, fall within what is known as the relevant property regime. This regime exists to stop trusts being used to park assets indefinitely outside the reach of inheritance tax, so instead of a single 40% charge on death, it spreads a lighter set of charges across the life of the trust. There are three of them.

The first is the entry charge. When you transfer assets into a relevant property trust during your lifetime, the value above your available nil-rate band (£325,000) is subject to a lifetime inheritance tax charge of up to 20%. Transfers within your nil-rate band carry no entry charge, and gifts you made in the seven years before settling the trust use up part of that band first, so the available allowance is often smaller than £325,000.

The second is the ten-year periodic charge, sometimes called the principal charge. On each tenth anniversary of the trust, the value of the relevant property above the available nil-rate band is reviewed and a charge of up to 6% can apply to that excess. The third is the exit charge, which can arise when capital leaves the trust, for example when it is paid out to a beneficiary, calculated by reference to the time since the last ten-year anniversary. The exact figures depend on the values, the timing and the trust’s history, which is why relevant property trusts need ongoing specialist attention rather than a one-off set-up.

Becoming a trustee is a serious legal responsibility, not an honorary title. Trustees must act in the beneficiaries’ best interests and within the terms of the trust deed, manage the assets prudently, keep trust money and property entirely separate from their own, treat the different beneficiaries fairly, and keep proper records of decisions and accounts. They can be held personally liable for losses caused by failing to meet these duties, which is why choosing capable trustees and giving them access to professional support matters as much as the drafting of the trust itself.

Almost all express trusts must now be registered with HMRC’s Trust Registration Service, whether or not they have a tax liability, and the register must be kept up to date as circumstances change. Where a trust receives income or makes capital gains, the trustees must also report and pay tax through a trust tax return. The combination of registration, returns and the periodic and exit charges is the ongoing cost of running a trust, and it should be weighed against the benefit before the trust is created.

This is one of the most common reasons people are sold a trust, and one of the most important to approach with caution. Schemes that promise to shelter your home from care-home fees by transferring it into a trust are frequently ineffective, and can leave a family worse off than if they had done nothing at all.

When a local authority assesses what someone can afford to pay towards care, it can look back at assets given away or placed in trust. If it decides the main purpose of the transfer was to avoid paying for care, it can treat the asset as if the person still owned it. That is the principle of deliberate deprivation of assets, and there is no fixed time limit on how far back an authority can look where it suspects that motive. A home put into trust specifically to dodge care fees can therefore be challenged, and the family may face the cost of the scheme on top of the care bill it was meant to avoid.

There are legitimate reasons to use a trust that involve the family home, and there are sound ways to plan for later-life costs, but they have to be set up for genuine reasons and at the right time, not as a last-minute reaction to a care assessment. This is firmly specialist territory. Speak to a qualified adviser before acting, and treat any off-the-shelf product that markets itself mainly on beating care fees with real scepticism.

Whether a trust is right for you depends entirely on your family, your assets and what you are trying to protect, and the wrong trust can cost more than it saves. We assess your situation, explain the realistic tax and control trade-offs, and work alongside a solicitor on the drafting where one is needed.

Trusts rarely stand alone. They sit alongside your will, your lifetime gifting and any available reliefs, so we look at the whole picture rather than selling a single product. To see how the pieces fit together, read the complete guide to inheritance tax, lifetime gifting and the seven-year rule, and business relief and succession, or go straight to our trusts service.