Everyone has their own unique way of describing a trust. I like to think of a trust like a treasure chest. A big wooden box that you can use to protect and manage your wealth for the benefit of others. You, the person creating the trust (known as the settlor), place your treasures into the chest, which might include money, property, or other valuable assets.
You then entrust a group of reliable ‘keyholders’ (called trustees) to manage and safeguard it, ensuring that the treasures are used according to your wishes and for the benefit of the people you’ve chosen (called beneficiaries).
Trusts are a powerful way to ensure your legacy is managed responsibly, whether during your lifetime or after you’ve gone. In this guide, we’ll explore the different types of trusts you can create, why people use them, and how they offer protection for your loved ones and assets.
Types of Trusts
Trusts can be established either through your Will (to take effect after your death) or during your lifetime.
Each type of trust serves different purposes, but they all work on the same principle: placing your treasures in a secure place with clear rules for how they’re managed and distributed.
Trusts in a Will
Discretionary Trusts
A discretionary trust is a flexible arrangement. You name a group of potential beneficiaries - such as your children, grandchildren, or even a charity - and leave it to the trustees to decide who receives what, and when. This is especially useful if your family’s circumstances may change over time, as it gives trustees the freedom to adapt to their needs. Normally people leave guidance to their Trustees using a ‘letter of wishes’. This guidance helps the trustees make good decisions after you have gone.
“I would like to leave my estate to my children, but I am worried that they will squander the money after I am gone. My daughter has a habit for buying things she doesn’t need, and I would prefer my money to be used to help her in a more responsible way.”
This is the simplest type of trust. The beneficiary has an immediate and absolute right to the treasures in the chest once they reach adulthood (usually at a specified age, commonly 18, 21 or 25 years). It’s a great way to leave something for young children without handing them a large sum too early.
“I am worried about leaving money to my grandson, he is reckless with money. If he received money at the age of 18, he is likely to buy a fast car and wrap it round a lamppost!”
Life Interest Trusts
A life interest trust allows one person (the life tenant) to benefit from the trust during their lifetime, typically by receiving income or living in a property. After their death, the remaining treasures are passed on to others - often children or grandchildren. This is commonly used to provide for a spouse while safeguarding assets for future generations.
“I would like to leave my half of the house to my wife, but I am worried about what might happen to her when I am gone. Ultimately, I would like my half of the house to go to my children. I am concerned that if my wife goes into care, there won’t be anything left for them to inherit.”
Trusts in Your Lifetime
Bare Trusts (Lifetime)
These operate much like their will-based counterparts, holding assets for a child or young beneficiary until they come of age. They’re often used to transfer wealth early while keeping it secure.
Discretionary Trusts
A lifetime discretionary trust provides the same flexibility as a will-based one. By creating it during your lifetime, you can start benefiting your chosen beneficiaries immediately while maintaining control over how the assets are managed.
“I would like to give my children their inheritance early, but I am concerned about giving away control.”
Interest in Possession Trusts
This type of trust allows a beneficiary to receive income generated by the trust’s assets - like rent from a property - while keeping the underlying treasures protected for others. It’s a smart way to provide ongoing financial support to a loved one without risking the assets themselves.
“I would like my son to benefit from my rental properties, but I am worried about giving him total control. I would prefer him to enjoy the rent during his lifetime and guarantee (as far as possible) that the properties are still available to my grandchildren when he passes away.”
Trusts for Vulnerable or Disabled Beneficiaries
These are tailored to provide long-term financial security for someone with disabilities or special needs. They ensure the beneficiary is supported while protecting their eligibility for state benefits.
Why Create a Trust?
Trusts are not just tools for the wealthy; they’re practical solutions for anyone wanting to manage and protect their assets responsibly. Here are some common reasons people set up trusts:
Protecting Young or Vulnerable Beneficiaries
Trusts are ideal for ensuring that children, young adults, or vulnerable individuals receive financial support when they’re ready - rather than handing over everything in one go.
Providing for a Spouse or Partner
A trust can ensure your spouse or partner is looked after while preserving assets for future generations.
Tax Efficiency
Trusts can help reduce Inheritance Tax and Capital Gains Tax liabilities, allowing you to pass on more of your wealth to your loved ones.
Controlling How Assets Are Used
By setting clear rules, you can ensure your treasures are used for specific purposes, such as education, housing, or starting a business.
Avoiding Family Disputes
Trusts provide clarity, ensuring everyone knows your wishes. This can prevent arguments or misunderstandings among family members after you’re gone.
Protecting Against External Risks
Trusts can help shield your assets from being lost in your children’s divorce settlements, business failures, or mismanagement by a beneficiary.
The Protections Trusts Provide
A trust doesn’t just hold your treasures, it also acts as a safeguard to protect them from potential threats. Here’s how:
- Trustees’ Responsibility: Trustees are legally bound to follow the rules you’ve set, ensuring the assets are managed wisely and only used for the intended beneficiaries.
- Shielding Assets: The trust owns the assets sat within it. Trusts can therefore help protect your assets from the financial risks that your loved ones might be facing.
- Long-Term Planning: By creating a trust, you ensure your wishes are followed even if circumstances change in the future.
- Tax Advantages: Certain trusts offer tax benefits, which can preserve more of your wealth for the next generation.
How to Get Started
Setting up a trust may seem complicated, but with the right advice, it can be straightforward. Think about your goals: who do you want to benefit, what treasures you want to protect, and how you want them to be used.
Once you have a good idea of your objectives, consult a professional to help design a trust that meets your needs.
By creating a trust, you’re not just locking your treasures in a chest; you’re securing their future for the people and causes you care about most. It’s a gift of protection, planning, and peace of mind - both for you and those who will benefit from it.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
