Definition
A trust fund is the collection of assets—such as money, property, or investments—held and managed by trustees for the benefit of named beneficiaries according to specific rules set by the settlor.
While "trust" refers to the legal arrangement itself, "trust fund" refers to the actual assets inside that arrangement. Think of it like the difference between a safe (the trust) and the valuables stored inside the safe (the trust fund).
What Does Trust Fund Mean?
Under the Recognition of Trusts Act 1987, a trust fund comprises the assets placed under the control of trustees for beneficiaries' benefit or for a specified purpose. These assets constitute a separate fund, legally distinct from the trustee's personal estate. A trust fund can include cash, property, investments, business interests, life insurance policies, or any combination of valuable assets. The settlor (the person who creates the trust) determines what goes into the trust fund, while trustees (usually two to four individuals or a trust corporation) hold legal ownership and manage everything according to the trust deed or will provisions.
Trust funds operate in two main ways. Inter vivos trusts are created during the settlor's lifetime, allowing immediate asset transfer for tax planning or asset protection. Testamentary trusts are established through your will and only come into effect after death. In both cases, trustees own the assets legally but must use them exclusively for beneficiaries' benefit under the Trustee Act 2000's duty of care. Different trust types give trustees varying levels of discretion: bare trusts require immediate distribution when beneficiaries reach 18, while discretionary trusts allow trustees to decide how much each beneficiary receives and when.
For example, Sarah and James, both 34, establish a testamentary trust fund in their wills worth £480,000 (their £400,000 home plus £80,000 savings). If both died while their children aged 6 and 4 were minors, trustees would manage the trust fund until each child reached 25, releasing funds earlier for education or housing needs. Similarly, David, 52, places £300,000 of investments into a discretionary trust for his adult children. If he survives seven years, this reduces his estate from £750,000 to £450,000, potentially saving £120,000 in inheritance tax, though the trust fund itself faces periodic charges.
Trust funds offer significant control over inheritance timing and conditions. Margaret, 68, places her £450,000 house in a life interest trust, giving her new husband Tom the right to live there for his lifetime while ensuring the property ultimately passes to her children from her first marriage. This protects both Tom's housing security and her children's inheritance rights.
However, trust funds are subject to complex taxation, not tax shelters. Discretionary trusts face three types of inheritance tax charges: entry charges at 20% on amounts over £325,000 when setting up, periodic charges up to 6% every ten years, and exit charges when distributing assets to beneficiaries. Trust income is taxed at 45% for non-dividend income and 39.35% for dividends above the £1,000 standard rate band. Capital gains tax at 20% (or 28% for residential property) applies to asset sales. The seven-year rule means you must survive seven years after placing assets into trust to achieve full inheritance tax benefits—dying earlier triggers tapering charges.
Common Questions
"How much money do you need to set up a trust fund?" You can set up a trust fund with any amount, though it's usually cost-effective when you have assets worth at least £50,000-£100,000 due to legal costs (typically £1,000-£3,000) and ongoing administration. Many parents create trust funds with £20,000-£50,000 for children's education or first homes, while larger estates might place £500,000+ in trust for inheritance tax planning. There's no legal minimum.
"Can I access money from a trust fund I created?" It depends on the type of trust and whether you included yourself as a beneficiary. Generally, effective estate planning requires giving up direct access to trust fund assets for tax benefits to apply, particularly the seven-year rule for inheritance tax. Settlor-interested trusts (where you can benefit) have adverse tax consequences, often negating the planning benefits you sought.
"What happens to a trust fund when the beneficiary dies?" This depends entirely on the trust deed terms. In bare trusts, the trust fund becomes part of the beneficiary's estate and passes according to their will or intestacy rules. In discretionary trusts, the deed typically specifies successor beneficiaries or gives trustees power to determine new beneficiaries. Life interest trusts usually specify that the trust fund passes to remainder beneficiaries (such as children) after the life tenant's death.
Common Misconceptions
Myth: Trust funds are only for wealthy families—I don't have enough money to need one
Reality: While trust funds were historically associated with wealthy families, they're now used by people with modest estates. With average UK house prices around £290,000, many ordinary families have estates approaching the £325,000 inheritance tax threshold. Trust funds can be established with as little as £20,000-£50,000 for specific purposes like protecting assets for young children or vulnerable adults. The key is whether the benefits—asset protection, control over distribution timing, potential tax savings—justify the setup costs (£1,000-£3,000) and ongoing administration expenses.
Myth: Money placed in a trust fund is protected from all taxes
Reality: Trust funds are not tax-free. They're subject to their own complex tax regime including income tax on generated income (at rates up to 45%), capital gains tax on asset sales, and inheritance tax through three separate charges: entry charges (20% on amounts over £325,000 when setting up), ten-yearly periodic charges (up to 6% of trust value), and exit charges when assets leave the trust. The seven-year rule means you must survive seven years after placing assets into trust to avoid inheritance tax on your death. Trusts can be tax-efficient when used correctly, but they're not tax shelters.
Related Terms
Understanding Trust Fund connects to these related concepts:
- Trust: The trust is the legal structure, while the trust fund is the assets within that structure
- Trustee: Trustees have legal ownership of trust fund assets and manage them under the Trustee Act 2000's duty of care
- Settlor: The settlor creates the trust and transfers assets into the trust fund, setting the rules for distribution
- Discretionary Trust: One of the most common trust types where trustees have discretion over distributing trust fund assets to beneficiaries
- Bare Trust: A simpler trust structure where beneficiaries have absolute entitlement to trust fund assets at 18, with different tax treatment
Related Articles
- Understanding Trusts in Your Will: Explains how trust funds work within testamentary planning and when they're appropriate for your estate
- Estate Planning for Growing Families: Shows how trust funds fit into comprehensive estate planning for families with increasing assets
- Protecting Your Children's Inheritance: Demonstrates how trust funds control when and how children receive inheritance rather than giving everything at age 18
- Inheritance Tax Planning Strategies: Explores how trust funds work alongside other strategies to reduce inheritance tax liability
- Second Marriage Estate Planning: Details how trust funds protect children from first marriages while providing for current spouses
Need Help with Your Will?
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Legal Disclaimer: This glossary entry provides general information about trust funds and does not constitute legal, tax, or financial advice. Trust law and taxation are complex areas that vary based on individual circumstances. Before establishing a trust fund, you should consult a qualified solicitor specialising in trusts and estate planning, and consider seeking advice from a tax advisor. Professional advice is essential to ensure the trust structure meets your needs and complies with current legislation. Tax treatment depends on individual circumstances and is subject to change. This entry covers England and Wales law only; Scotland and Northern Ireland have different trust law provisions.