13 February 2025
What to Consider when Setting Up A Trust
Setting up a trust can be one of the most effective ways to protect your assets and ensure they are distributed according to your wishes. Whether you are planning for your family’s future, reducing tax liabilities, or safeguarding assets for vulnerable beneficiaries, getting tailored legal advice is essential to make the right decisions at the right time.
Trusts play a pivotal role in estate planning. They are particularly useful for clients who want to provide long-term financial support to someone while maintaining some control over how their assets are used.
Here we outline the different types of trust, and highlights the key considerations to discuss with your solicitor if you are thinking about setting up a trust.
What Is A Trust and Why Set One Up?
A trust is a legal arrangement where assets are are held by one party (the trustees) who manage them for the benefit of beneficiaries. This structure allows for greater control over how and when assets are distributed, making it a useful tool for estate planning, tax planning and asset protection.
Common reasons to set up a trust include:
- Protecting assets for future generations
- Reducing exposure to Inheritance Tax (IHT) by structuring ownership effectively
- Safeguarding assets for vulnerable or young beneficiaries
- Ensuring assets are used in accordance with your wishes e.g. in blended families where children from previous marriages are involved
- Facilitating charitable giving through tax-efficient donations
Types Of Trust in the UK
There are various types of trust, each designed for specific purposes. Common examples include:
- Bare Trusts: These provide simple asset holding for beneficiaries who are entitled to the assets outright, commonly used for children who will gain control of the assets at 18
- Discretionary Trusts: Trustees have full discretion over how and when to distribute assets to beneficiaries. These are useful for protecting assets from misuse or uncertain future circumstances.
- Life-interest Trusts: A beneficiary (often a spouse) is entitled to income from the trust during their lifetime but the capital passes to other beneficiaries after their death
- Charitable Trusts: These can be created to support charitable causes often offering tax advantages to the donor
The choice of trust depends on your objectives, family circumstances, and tax considerations which we will discuss with you. Each option has its own legal and tax implications so it is important to seek advice tailored to your situation to ensure the best outcome.
Setting Up A Trust In Your Will Or During Your Lifetime
Trusts can be set up in two ways:
- Lifetime Trusts: Created during your lifetime, these are particularly useful for proactive estate planning. If you transfer assets into a lifetime trust more than seven years before your death, they may no longer count towards your estate for IHT purposes. However, lifetime trusts can be subject to additional taxes under what is called the ‘relevant property regime’. This regime imposes periodic charges (every 10 years) and exit charges when assets are taken out of the trust. It is crucial to understand the impact of these taxes and seek advice to understand the potential benefits and costs for your situation.
- Will Trusts: these take effect upon your death and are funded by the assets in your estate. While will trusts are subject to IHT at the time of death, they can be structured to take advantage of reliefs like the nil-rate band and the residence nil-rate band. For example, a will trust might protect the family home for children while allowing a surviving spouse to benefit from the property during their lifetime. This approach can be particularly useful for blended families, where there are children from a previous marriage. A will trust can ensure that assets are preserved for specific beneficiaries while still providing for the needs of a surviving spouse, balancing fairness for all parties.
Each approach has different tax implications, so professional advice is essential to avoid unexpected liabilities.
Understanding the structure and purpose of a trust is key to achieving your goals. This includes aligning the trust’s objectives with your long-term plans, your IHT position, whether the assets are intended to be distributed over a certain period or preserved for future beneficiaries. Consideration should also be given to your stage of life and financial circumstances when setting up the trust, balancing present needs with future intentions.
Careful thought should be given to potential risks, such as relinquishing control over assets you might later need or regret transferring. Collaborating with your solicitor and independent financial advisor (IFA) can help address these considerations and ensure the trust aligns with your overall estate planning strategy.
Both types of trusts require careful planning to navigate the complex tax landscape and, along with legal and IFA advice, tax advice should also be sought to advise on the tax consequences.
Lifetime trusts may offer tax efficiency for those willing to relinquish immediate access to assets, while will trusts are ideal for ensuring that your estate is distributed in line with your wishes after your death.
UK Tax Implications Of Trusts
While trusts can offer tax advantages, they are subject to various taxes in the UK:
- Inheritance Tax (IHT): Lifetime trusts may reduce IHT if assets are transferred early enough, but they can also attract entry, periodic and exit charges.
- Income Tax: Beneficiaries receiving income from a trust may be taxed at different rates depending on the type of trust.
- Capital Gains Tax (CGT): When assets within a trust are sold or transferred, CGT may apply, though exemptions and reliefs are available in some cases.
- Trust Registration Service (TRS): Most trusts must be registered with HMRC’s TRS to comply with anti-money laundering regulations. Failure to register can result in penalties.
What Your Solicitor Needs To Know
To set up a trust, your solicitor will require detailed information about:
- The type and value of assets to be placed in the trust.
- The intended beneficiaries and their needs.
- Your tax planning goals.
- Potential complexities, such as overseas or business assets.
- The appointment and responsibilities of trustees.
- Provisions for vulnerable or minor beneficiaries, such as disabled children.
- family dynamics, potential disputes or likely objections to the trust amongst beneficiaries;
- who the trustees should be and whether their consent to act should be sought for a future appointment
- your preferences for how the trust should be managed and overseen by the trustees and whether any restrictions should be imposed on the trustees.
A thorough discussion with your solicitor can help identify potential challenges and ensure the trust is tailored to meet your unique circumstances.
How We Can Help
Our legal team has extensive experience in setting up trusts and guiding clients through the legal and tax considerations. We can help you:
- Choose the right type of trust for your situation.
- Navigate the legal and administrative process.
- Understand the tax implications and benefits.
- Ensure compliance with HMRC regulations and the Trust Registration Service.
For more information or to discuss setting up a trust, please contact us today.
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