If you want to make sure your money is used exactly how you want by another person, then putting it into a trust could be worth considering.
In this article, we’ll explain what a trust is, when it might be useful, the role of a trustee, and how to go about setting one up.
What is a trust (or trust fund)?
Let’s say you wanted to make sure some of your money went towards your care if you were to get very ill and couldn’t manage your funds yourself. You could put the money directly in the hands of a friend and rely on them to spend it according to your wishes, but for many people, the preferred option is to set up a trust.
Any money placed into the trust would then legally have to be spent according to the rules you set out. So, in this scenario, your friend would have to use all of the money that you entrusted to them to pay for your care, and it would be against the law for them to spend any of it for their own benefit.
In this example, you are both the “trustor” (or “settlor”) and “beneficiary”, meaning you are both the person putting the money into the trust and the person who the money will benefit. Your friend is the “trustee” and the money is the “trust property” (the trust property can also include assets, investments, income or other regular payments).
When the money leaves your estate and enters the trust depends on the type of trust you create. In some cases, it might happen as soon as the agreement – the “deed of trust” – is drawn up. Alternatively, you can write your will to create a trust when you die, so that the assets only enter the trust then.
When is a trust useful?
A trust can be useful in several different scenarios.
One common use, as in the example above, is to make sure your money is used for your care if you become too old or sick to manage it yourself.
Another common reason trusts are established is to ensure that someone you are responsible for – such as a child – could benefit from your money if you were to become very ill or die unexpectedly, or simply once they reach a certain age. A sibling or friend could be entrusted with the money to put towards your child’s care, or to hold onto until the child reaches an age where they can spend it responsibly, at which point it is paid to them either as a lump sum or as a regular income.
As stated earlier, many kinds of regular payments can also be included as trust property. For example, if you claim Disability Living Allowance on behalf of a disabled child, you could include this in the trust so that your trustee could continue to receive the payments and use them for your child’s benefit.
What are the different types of trust?
There are a few different types of trust that determine when and how the trustee receives the trust property. It also affects how the money is taxed, which you can read more about on GOV.uk.
Bare trust
A bare trust is the kind described earlier, where the assets are held by the trustee until the beneficiary turns 18, at which point they receive the money.
Under this type of trust, parents or grandparents are usually the trustees and decide how the child’s money is invested. The child is the owner and can take ownership of all the capital and income of the trust at age 18 or over if they’re in England and Wales, or at the age of 16 if they live in Scotland. Until that time, the trustees are responsible for looking after the assets.
Any assets held within a bare trust on behalf of a child are taxed as if they belong to the child, which usually means there’s no income tax and capital gains tax (CGT) for them to pay. A child has the same personal income tax allowance and CGT allowances as an adult. For the 2022/23 tax year, the personal income tax allowance is £12,570 and the CGT allowance is £6,000.
However, if a parent sets up the trust and the income from it exceeds £100 per tax year then the income will be treated as the parent’s income for tax purposes. Usually setting up a bare trust is very straightforward – often, for example, if you are setting up an investment account on behalf of a child, the account provider will offer an ‘election for bare trust’ form you can download and complete.
Discretionary trust
With a discretionary trust, the trustees control the assets and decide how it is spent, as long as it is on the beneficiaries. You might, for instance, set up a discretionary trust where your children are the trustees and their children – your grandchildren – are the beneficiaries.
Interest in possession trust
The beneficiary receives income from the trustee straight away but can’t access or control the trust property itself, and has to pay income tax on the income they receive.
For example, you might receive dividends from your shares in a company, and want them to continue to go to someone when you die. So, your will can create an interest in possession trust that means your beneficiary will continue to receive the dividend income after you pass away.
Accumulation trust
Trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.
Trust for a vulnerable person
If the only beneficiary is a vulnerable person, such as someone with a disability, they will pay less tax on the income from the trust.
Settlor-Interested Trust
A trust where the settlor is also the beneficiary, meaning the person putting the money into the trust is also expected to benefit from it. This includes the example given earlier where you would use a trust to pay for special care if you fell ill. Bear in mind this is not a unique kind of trust from the others listed – a settlor-interested trust usually also falls under discretionary trust, interest in possession trust or accumulation trust.
How much does it cost to set up a trust?
The main charge of setting up a trust will come from using a solicitor. They will typically charge around £1000 to £1500 for this service. This may seem expensive, but setting up a trust could potentially help avoid complex financial issues further down the line.
How do I set up a trust?
You should seek the help of a solicitor in order to set up a trust, as it is a complex legal process that requires specific wording. This is especially true if you want it to be a part of your will.
If you’re looking for a solicitor, you can find one through the Law Society’s free Find a solicitor service. Make sure you check reviews for the solicitor you’re planning to use, so you can see how other people have rated their service.
You’ll also need to find a person, people, or a company who are happy to take on being a trustee. Think carefully about who you know that is responsible enough for the role. You can choose a company such as a bank or solicitor’s firm, but they will charge for this service.
If you’ve been asked to be a trustee, ask questions and give it a lot of thought – you don’t need to say yes right away.
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