Estate Planning: A Short Guide to Trusts

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What is a trust? How does it work? Broadly speaking, a trust is a legal structure which offers a specific way to manage assets (e.g. cash, investments or property). In the financial planning world, trusts are often used to help people manage the transfer of wealth to the next generation.

Trusts offer a lot of financial planning options yet they can be complex to understand and set up. Speak with a professional before committing to one, to ensure you have all the information you need to consider the potential risks and downsides.

Below, our Norwich financial planners offer a short guide to trusts in 2023. We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

01603 789966

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How do trusts work?

A trust broadly involves three types of people – the “settlor”, the “trustees” and the “beneficiary” (or beneficiaries). The first is the person who places assets into the trust. The second are the people who manage it and the third is the person who eventually benefits from the trust. 

For instance, two parents (settlors) might set up a trust with three trustees. The latter might include trusted friends or professionals. The named beneficiaries of the trust are their children, who will benefit from the trust’s assets when the settlors die. The trustees will then oversee the process of transferring the wealth to the beneficiaries.

Why not simply use a will to hand down assets to your loved ones – why involve a trust? There can be many reasons. Perhaps your loved ones are currently too young or irresponsible to handle a significant inheritance from you. A trust can help ensure that your money is used in a respectful, useful way (e.g. putting a deposit down on a house rather than buying a flashy car).

Trusts can also be useful to help pass down assets whilst you are still alive. In some cases, using a trust can also help with your inheritance tax (IHT) planning.


What are the different types of trust?

There are at least 7 types of trust in the UK, each with its own intended purpose(s) and rules. The simplest type is the “bare trust”. Here, the settlor puts assets into the trust and the beneficiary (e.g. your child) receives ownership of them when they turn 18.

Another interesting type is the “interest in possession” trust. This allows any income generated by the trust’s assets to go directly to the beneficiary. For example, suppose you (the settlor) put a large dividend-generating portfolio into this trust type. Your child could receive the dividend income for the rest of their life. When you die, the ownership of the shares goes to your child.

Discretionary trusts are also notable. Here, the settlor(s) give the trustee(s) much more power over how to use the trust’s income and assets. The exact amount of control will depend on the trust deed, but trustees might be able to decide which beneficiary gets payments, how often and the conditions imposed on the payments (e.g. the money must be used to pay for university).


Can I avoid inheritance tax (IHT) with a trust?

There is a common misunderstanding that using a trust lets you avoid inheritance tax (IHT). Yet this is not strictly true. Rather, certain types of trust can help you mitigate an IHT liability in certain situations.

The UK government explains a particular case where an interest in possession trust can avoid inheritance tax provided that the asset(s) remains in the trust and stays in the “interest” of the beneficiary. However, if the assets were put into the trust on or after 22 March 2006, then the 10-yearly Inheritance Tax charge may be due.

The 10-year charge is a somewhat complex area of trust planning. In simple terms, every decade on the anniversary of a trust, a maximum IHT charge of 6% may be imposed. 


How do I set up a trust?

A trust can be written into a will and is best set up with the help of an experienced financial planner. You will need to clearly state which asset(s) are going into the trust, the personal information of the trustees and beneficiaries and the date that the trust becomes active.

It is especially important to choose your trustees carefully. Are these people trustworthy, willing and prepared for the work involved with managing your trust? You might choose close family or friends who you can rely on. However, you could also include a professional as a trustee.

Certain trusts may need a dedicated trust document to be set up properly. It will need to be signed by all relevant parties. Remember, establishing a trust is no small decision. It has serious implications for you and others, so think carefully and seek professional advice beforehand.


Conclusion & invitation

If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at no cost to you:

01603 789966

[email protected]