Setting Up an Inheritance Trust Fund: What You Need to Know

An inheritance trust fund is a legal arrangement that lets you pass money, property or investments to your family while keeping control over how and when those assets are used. Instead of giving an asset outright, you place it in the care of trustees, who manage it for the people you choose to benefit. Trusts can be created during your lifetime or by your will, and the right type depends on what you are trying to achieve.

Why set up an inheritance trust?

People use trusts for several reasons: to provide for children until they are old enough to manage money, to protect assets for a vulnerable or disabled relative, to provide for a current partner while preserving capital for children from an earlier relationship, or to keep some control over how an inheritance is used. A trust can also help structure an estate for inheritance tax purposes, though the rules are complex and changing.

What types of trust are there?

The main types used for family inheritance include:

• Discretionary trust, the trustees decide how and when to pay out to a class of beneficiaries, giving maximum flexibility
• Life interest (interest in possession) trust, one person receives the income or use of an asset for life, with the capital passing to others afterwards
• Bare trust, assets are held simply for a named beneficiary, often a child, who becomes entitled at 18

You can read more about one common type on our guide to life interest trusts, linked from our trusts page.

Who are the people involved?

Every trust has three roles. The settlor creates the trust and puts assets into it. The trustees legally own and manage those assets and must act in the beneficiaries’ best interests. The beneficiaries are the people who benefit. The same person can play more than one role, but choosing reliable trustees is one of the most important decisions, as the trust may run for many years.

How are trusts taxed?

Trust taxation is one of the most technical areas of the law. Putting assets into most trusts during your lifetime is a chargeable transfer for inheritance tax, which can trigger a charge where the value exceeds your available nil-rate band (currently £325,000). Many trusts also face a periodic inheritance tax charge every ten years and a charge when assets are paid out, as well as income tax and capital gains tax. Because the nil-rate band is frozen and other reliefs are changing, the figures move over time, so up-to-date advice is essential.

Is a trust right for you?

Trusts are powerful but not suitable for everyone, and a poorly designed trust can cost more than it saves. The right choice depends on your assets, your family and your goals. We can review your situation and explain whether a trust, and which type, makes sense for you. To discuss it, see our trusts service or request a callback.