Definition
A trust is a legal arrangement where assets are held and managed by trustees for the benefit of chosen beneficiaries, according to instructions set by the person who created the trust.
Trusts provide control over when and how beneficiaries receive assets, making them valuable tools for protecting inheritances, providing for young children, and managing complex family situations.
What Does Trust Mean?
Under the Recognition of Trusts Act 1987, a trust is the legal relationship created—during your lifetime or on death—by a person (the settlor) when assets have been placed under the control of a trustee for the benefit of a beneficiary. The trust involves three parties: the settlor who creates it and transfers assets, the trustee who legally owns and manages those assets, and the beneficiary who receives the benefit. Crucially, trustees own assets legally but not beneficially—they cannot use trust assets for themselves. Trusts can be created during your lifetime (inter vivos) or in your will (testamentary trust), governed by a trust deed or will provisions setting out trustee powers and beneficiary entitlements.
The Trustee Act 2000 defines trustees' duties and powers. Trustees must follow the trust terms exactly and act in beneficiaries' best interests with a statutory duty of care. They have legal obligations including investment duties, accounting requirements, and impartiality between beneficiaries. Trusts specify conditions such as age requirements, life events like marriage or university attendance, or whether beneficiaries receive periodic payments or lump sums. Different trust types offer different control levels: bare trusts give beneficiaries fixed entitlement at age 18, discretionary trusts allow trustees to decide distributions, and life interest trusts split income and capital between beneficiaries.
Sarah creates a trust in her will leaving £200,000 to her daughter Emma, accessible only at age 25. Her brother David manages the money as trustee, investing it and using income for Emma's education. At 25, Emma receives the full amount. James wants his wife Claire to live in their £450,000 house after his death while ensuring it eventually passes to his children from his first marriage. He creates a life interest trust giving Claire the right to live there for life, with the house passing to his children when she dies or remarries. Michael's son Tom has severe learning disabilities and receives means-tested benefits. Michael creates a discretionary trust with £100,000, allowing trustees to provide extras for Tom's care without affecting his benefits entitlement.
Trusts have separate tax treatment with rates often higher than personal rates—45% income tax on income above £500 and 24% capital gains tax for most trusts, compared to basic rate of 20% and personal CGT allowances for individuals. Trusts are not tax avoidance schemes but tools for control, protection, and legitimate planning. Most trusts must be registered with HMRC's Trust Registration Service within 90 days of creation. Ongoing administration requires trustees to keep accounts, file tax returns, and make distributions. Legal fees for setup range from £500 to £2,500 depending on complexity. Trusts make sense for minor beneficiaries, vulnerable beneficiaries, blended families, asset protection, and inheritance tax planning when combined with other tools.
Common Questions
"Do I need a trust in my will or is a simple will enough?" Most people don't need a trust—a simple will works perfectly if your beneficiaries are adults who can manage money. Consider a trust if you have young children, want to protect assets from beneficiaries' divorces or creditors, have a blended family, or need to provide for someone who cannot manage money themselves.
"If I put assets in a trust, do my children avoid inheritance tax?" No—trusts don't automatically avoid inheritance tax and often face their own tax charges. Assets in most trusts are potentially exempt transfers or immediately chargeable. Trusts created in wills count as part of your taxable estate on death. Trusts are valuable for control and protection, not tax avoidance.
"Can I set up a trust myself or do I need a solicitor?" While legally possible to create a trust yourself, it's strongly inadvisable except for the simplest bare trusts. Trust law is complex, and mistakes can be costly—incorrectly worded trust deeds can create unintended tax charges or fail to achieve your goals. Professional advice is worthwhile given that errors can cost thousands.
Common Misconceptions
Myth: Trusts are only for wealthy people with large estates.
Reality: Anyone with assets to pass on can benefit from a trust. Even modest estates use trusts effectively—parents with £100,000 in savings often create trusts to prevent 18-year-olds inheriting large sums they're not ready to manage. The inheritance tax threshold (£325,000, or £500,000 with residence nil-rate band) affects many ordinary families, especially homeowners in high-value areas.
Myth: Putting money in a trust means hiding it from tax authorities.
Reality: Trusts are completely transparent to HMRC and must be registered with the Trust Registration Service in most cases. Trustees must file annual tax returns reporting all trust income and gains. Many trusts pay higher tax rates than individuals—45% income tax and 24% capital gains tax for most trusts. The benefit of trusts is control and protection, not hiding assets.
Related Terms
Understanding trusts connects to these related concepts:
- Trustee: The person appointed to manage the trust, responsible for administering assets according to trust terms and legal duties.
- Settlor: The person who creates the trust and transfers assets into it, defining the trust's purpose and beneficiaries.
- Beneficiary: The person who benefits from the trust, with rights depending on the trust type and terms.
- Discretionary Trust: A trust type where trustees have discretion over distributions, offering maximum flexibility for uncertain circumstances.
- Bare Trust: The simplest trust type where beneficiaries have absolute right to assets at age 18 (16 in Scotland).
Related Articles
- Setting Up a Trust for Your Children in Your Will: Detailed guidance on creating testamentary trusts for minor children, the most common use case for trusts in wills.
- What Is a Trust? (And How Do They Work in Wills?): Comprehensive coverage of trusts in will-based estate planning, expanding on this definition with setup process and decision factors.
- Using Trusts to Protect Your Estate: Explores how trusts protect inheritances from beneficiaries' divorces, creditors, and poor financial decisions.
- Life Interest Trusts for Blended Families Explained: Covers life interest trusts for providing for current spouse while protecting children's inheritance in second marriages.
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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal advice. For advice specific to your situation, consult a qualified solicitor.