How to set up a trust

Setting up a trust can be an advantageous way to manage your assets and ensure they are distributed according to your wishes, to the right people, at the best time.

Equally, the wrong trust, created badly or in an ill-advised way, can be an expensive disaster for all concerned.

What is a trust?

A trust is a legal entity that can hold and manage assets on behalf of one or more beneficiaries. A trust is a legal arrangement that is usually, but not always, created by a legal document in which you (‘the settlor’) transfer ownership of assets to another person or people (‘the trustees’) to hold and manage it for the benefit of one or more third parties (‘the beneficiaries’). Trustees have a duty to manage the trust's assets in accordance with the trust document and the law.

The different types of Trusts

There are many different types of trusts, either intentionally created by a document, usually a Will or a legal deed, or arising automatically from or inferred from certain circumstances. The type of trust required will depend on the circumstances in which it’s being created, e.g. while you are alive (‘a lifetime trust’ or an ‘inter vivos trust’) or on your death (‘a will trust’ or ‘testamentary trust’), and the intention behind it – why it is needed.

Some examples of the more usual trusts that can be created during your lifetime or on your death are:

A Bare Trust

This is the most straightforward type of trust: an asset is held for another by trustees in their name, but it really belongs outright to the beneficiary, and, for tax and other purposes, it is generally treated as owned by the beneficiary. Sometimes they are created for children who may be under 18 and unable, therefore, to legally own the asset in their own name. Once they reach 18, they may choose to leave the asset in the trustees’ name, but equally they can require that it is transferred to them. 

A Life Interest Trust

Sometimes referred to as an ‘IIP trust’ or ‘interest in possession’: Usually, here the trustees hold the asset for the beneficiary for their lifetime, and after their death (or sooner if the trust document permits it), the asset will pass to other beneficiaries. Their tax treatment depends on whether this is something you create during your lifetime or on your death. The identity of the beneficiary and the type of asset held can also affect the tax treatment. They are often used to give someone the right to live in a property for their lifetime, with the property then passing to others after they die. In Wills, these types of trusts can be useful in a second marriage scenario.

A Discretionary Trust

You may also sometimes hear these trusts being described as ‘relevant property trusts’ or a trust within ‘the relevant property regime’. A discretionary trust is usually a very flexible arrangement where assets are held by trustees for a range/ variety of beneficiaries (who can be named or defined as a class or group of people e.g. ‘my grandchildren’), and the trustees are given discretion about which of the beneficiaries to benefit and when. It is usual that you would set out your wishes and give the trustees some guidance in a separate letter of wishes. Special tax rules apply to discretionary trusts. Their flexibility makes them very useful, but the legal and tax rules that apply to them are complex, and it is very easy for ill-advised arrangements or trustees to lead to problems. 

Sometimes trusts can include elements of both life interests and discretionary. 

These are just a few examples of the different types of trusts that can be created. Trusts are a big subject, so taking good-quality legal advice is essential to create the right type of trust for the circumstances. It is important to find a specialist solicitor with relevant qualifications and experience. An experienced Solicitor who is a STEP (The Society of Trust and Estate Practitioners) member will be a good starting point. 

Remember that the most appropriate type of trust depends on the specific circumstances of each case. 

Do standard or free trust forms and documents work?

They might work, but the question is, to achieve what?! Generally, if a trust is ‘sold’ as a standard, one-size-fits-all, amazing solution, the chances are it won’t be quite right or create arrangements to best effect for you and your individual circumstances. 

An example we have dealt with is where a third-party (non-solicitor adviser) provided our client with a standard document to place a substantial investment in trust, purportedly to protect the money from future care fees. They are single with no immediate close family or anyone else dependent on them. The non-solicitor adviser was paid more than £12,000 in fees for the financial transaction.

When might you need to set up a Trust?

There may be specific times in your life when you might consider setting up a Trust, such as:

Estate planning

Setting up a trust is often discussed as part of your estate planning, for example, when you are making your Will or if your estate may be liable for inheritance tax on death. Your Will may include trusts and/ or you may also consider putting some assets into trust while you are alive.

Protecting assets

A trust can sometimes create a protective ‘force-field’ around assets, protecting them from future claims by third parties. People often consider using trusts to protect some of their assets if, for example, long-term care costs are a concern or there are concerns about marital or relationship breakdowns. They can be advantageous in second-marriage scenarios, particularly when there are children from previous relationships, when a beneficiary is very young, or when a beneficiary may be financially irresponsible. Trusts can also be very beneficial if a beneficiary is known to be vulnerable or has disabilities. Trusts cannot always protect assets; it depends on the circumstances, and sometimes they can be disadvantageous for tax purposes.

Managing assets

A trust can be a useful vehicle for managing assets going forward, particularly in some of the circumstances mentioned above. In this context, it is essential to appoint the right people, with the necessary skills and attributes to be trustees. Being a trustee is a role that entails many legal duties, responsibilities, and potential liabilities. It is not an ‘honour’ to be asked to be a trustee, and it is not something to be undertaken as ‘a favour’. 

The decision to establish a trust and the framework for it should be made only after careful consideration of all the circumstances and objectives. It should only be done with the advice of a specialist trust solicitor, often acting alongside an accountant and financial adviser. All the free information out there makes everyone think they should be able to know everything, without paying for expert advice. The best piece of advice is to take good advice.

Acting as a Trustee

You have various legal duties and responsibilities as a trustee. You cannot hide behind the trust, and you may find yourself personally liable in some circumstances if things go wrong. Being a trustee puts you in a position of great responsibility, and ignorance will be no defence if things go awry.

How much does a trust cost?

The cost of setting up a trust will depend on all the circumstances and whether this is something you do in your Will (so the trust only takes effect on your death) or during your lifetime. You are not paying for just a standard document to be produced; you are paying for someone to take time to consider your circumstances first and give you valuable advice before the document is drafted.