Do you actually need a trust? A decision guide, not a sales pitch

Trusts have a reputation problem. Half the people who hear about them think they are something only the very wealthy use; the other half have been told by a marketing campaign that they should set one up immediately. Neither is right.

A trust is a tool. Like any tool, it is useful for some jobs and a poor fit for others. This guide is a decision aid: when does a trust genuinely add value, when does it add cost for no benefit, and what other options exist that may do the job more cheaply.

What a trust is, in plain terms

A trust is an arrangement in which one or more trustees hold assets on behalf of one or more beneficiaries. The settlor (the person setting up the trust) places assets into it. The trustees become the legal owners. The beneficiaries are the people the assets are held for.

That separation between legal ownership and beneficial entitlement is the entire point of the trust. It means the trustees can hold and manage the assets for the benefit of the beneficiaries, on terms set by the settlor, without the assets being part of any one person's estate or being available to that person's creditors in normal circumstances.

The spend-vs-save test

A useful first question, before you spend any money on advice, is: are these assets you might need to spend in your own lifetime?

If the answer is yes (you might draw on the savings for income, a care home, a major purchase, or to help a child with a deposit), putting them into an irrevocable trust is rarely a good idea. You lose access to your own money.

If the answer is no (these are assets you genuinely intend to pass on intact, and you do not need the income from them now or later), a trust may make sense as part of the wider estate plan.

Genuinely good reasons to use a trust

There are several reasons families set up trusts that consistently survive scrutiny.

Control over when and how a beneficiary receives an inheritance

A trust can defer an inheritance beyond 18, give the trustees discretion to release funds when they consider it appropriate, and avoid lump-sum payments to young adults during periods of vulnerability. This is one of the most common and least controversial uses.

Protection against external claims

Assets in a discretionary trust are generally outside the reach of a beneficiary's creditors. They can also generally be excluded from the matrimonial pot in a beneficiary's divorce, though this is not absolute, and any specific divorce case looks at the substance of the trust rather than its label.

Inheritance tax planning over time

Assets gifted into a discretionary trust during your lifetime are outside your estate once seven years have passed, subject to the rules on transfers into trust. For families with estates above £1 million who can afford to part with assets now, this can be one of the more effective routes to reduce inheritance tax over time.

Continuity for vulnerable beneficiaries

Where a beneficiary has a disability, an addiction problem, or any other circumstance that makes managing money themselves difficult, a discretionary trust gives someone the family trusts the role of administering the inheritance in the beneficiary's interest. For a vulnerable beneficiary, this can be more important than the tax position.

Blended family planning

A life interest trust within a will can give a surviving spouse the use of an asset (income from investments, or the right to live in a home) while preserving the underlying capital for children of an earlier marriage. This is a common and effective solution for second marriages.

Reasons people are sometimes sold a trust that do not stand up

There are also reasons trusts get marketed that, on closer inspection, do not justify the cost and complexity.

• To dodge care home fees by transferring the home into trust. The local authority's deliberate deprivation rules can override the transfer. A trust set up late and specifically to avoid care fees is the classic example of an arrangement that fails when tested.
• To avoid probate. A trust set up in lifetime does avoid probate on the trust assets, but the cost of running the trust is usually more than the cost of the probate it avoids.
• To save inheritance tax that would never have been paid anyway. If your estate is comfortably within the nil-rate band, a trust costs you in fees and administration without generating any meaningful tax benefit.
• Because someone selling a 'family protection trust' said so. Some of the firms aggressively selling trusts are not regulated, do not offer real legal advice, and do not stay on the hook if it goes wrong.

The trade-offs of a trust

Even where a trust is the right answer, it is not free. Some trade-offs worth being clear-eyed about:

• Loss of access. Once assets are in an irrevocable trust, they are not yours to spend. You can sometimes be a beneficiary, but that brings its own restrictions.
• Set-up cost and ongoing administration. A trust needs to be registered with HMRC's Trust Registration Service, files its own tax returns, and may need professional trustee support.
• Tax inside the trust. Income tax and capital gains tax apply to trusts at different rates from individuals. Discretionary trusts in particular pay tax at higher rates on income.
• Trustee duties. Trustees have legal responsibilities and can be personally liable for breaches of trust. Choosing trustees who are willing and able to take on that role is part of the work.
• The 10-year periodic charge and exit charge on discretionary trusts above the nil-rate band. These are usually manageable but they are real.

Alternatives that may do the job

Before assuming a trust is the answer, it is worth checking whether something simpler does the same job:

• A well-drafted will with provisions to delay distributions to specific ages
• Outright gifting to adult children, with the seven-year rule running
• Regular gifts from surplus income, immediately outside the estate if structured properly
• Life insurance written in trust, which is itself a small trust used for one purpose
• Joint ownership structures on property

Red flags meaning you should get advice

If any of the following apply, a trust may genuinely help, and it is worth speaking to a specialist:

• Your estate is above £1 million and includes assets you can afford to part with
• You have a blended family with children from a previous relationship
• You have a beneficiary with a disability or other vulnerability
• You have a business that needs continuity planning, including business property relief
• You have minor children and want their inheritance deferred and managed

If none of these apply and your estate is comfortably under the inheritance tax thresholds, a trust is probably not what you need.

Simply Estate is an estate planning firm. Our trust team will tell you honestly whether a trust fits your situation, or whether something simpler does the job. Visit our trusts page to book a free, no-obligation review.