Trust Basics for Estate Planners

Trusts are legal arrangements where assets are held by trustees for the benefit of beneficiaries. Understanding trusts is essential for estate planners - for the complete career overview, see our guide on How to Become an Estate Planner UK.

Key parties in a trust:

• •Settlor - The person who creates the trust
• •Trustees - People who manage the trust assets
• •Beneficiaries - People who benefit from the trust

Why trusts are used:

• •Protect assets from care home fees (with limitations)
• •Provide for vulnerable beneficiaries
• •Reduce inheritance tax (in some cases)
• •Protect family wealth through generations
• •Control how and when beneficiaries receive assets

Common misconceptions:

• •"Trusts are only for the wealthy" - Not true
• •"Trusts avoid all inheritance tax" - Not usually
• •"Trusts protect everything from care fees" - Limited
• •"Trusts are overly complicated" - Not always

Your role as estate planner:

You need to understand trusts well enough to:

• •Recognise when they might help
• •Explain options clearly to clients
• •Set up simple trusts correctly
• •Know when to refer complex situations

Several types of trusts are commonly used in estate planning:

Life Interest Trust

• •Surviving spouse has right to live in property/receive income
• •Capital eventually passes to other beneficiaries
• •Common for second marriages to protect children's inheritance

Discretionary Trust

• •Trustees decide how to distribute assets
• •Flexible for changing circumstances
• •Often used for vulnerable beneficiaries
• •Can help with tax planning

Bare Trust

• •Beneficiary has absolute right to assets
• •Often used for children (hold assets until 18)
• •Simple and transparent

Property Protection Trust

• •Protects property while allowing spouse to live there
• •Share of property held in trust
• •Aims to protect against care fees and remarriage

Disabled Person's Trust

• •Special rules for disabled beneficiaries
• •Protects means-tested benefits
• •Specific tax treatment

Which to recommend:

This depends entirely on client circumstances. Your training should cover when each type is appropriate and how to explain the options clearly.

Understanding the tax implications of trusts is important. For more on IHT, see our Inheritance Tax Basics guide:

Basic position:

• •Many trusts have their own inheritance tax rules
• •Not all trusts reduce tax - some increase it
• •The "nil rate band" (£325,000) is key threshold

Potentially Exempt Transfers (PETs):

• •Gifts to individuals are PETs
• •If you survive 7 years, no IHT
• •Gifts to most trusts are NOT PETs - they're chargeable

Chargeable Lifetime Transfers:

• •Gifts to most trusts are immediately chargeable
• •No tax if within nil rate band
• •20% tax on excess (plus more if settlor dies within 7 years)

Periodic and exit charges:

• •Some trusts face charges every 10 years
• •And when assets leave the trust
• •Maximum 6% of value above nil rate band

Key point for clients:

Trusts are not primarily tax-saving vehicles. They're for:

• •Control and protection
• •Family circumstances
• •Vulnerable beneficiaries
• •Specific estate planning goals

Tax benefits are often secondary and sometimes non-existent.

Many clients find trusts confusing. Clear explanation is a key skill:

Use analogies:

"A trust is like a safe deposit box. You put assets in, appoint keyholders (trustees), and give instructions about who benefits and when."

"Think of it as a holding pen. Assets go in, and trustees manage them according to your rules until beneficiaries receive them."

Avoid jargon:

• •Say "the person who creates the trust" not "settlor"
• •Say "the people who manage it" not "trustees" (initially)
• •Explain each term when you first use it

Address concerns directly:

• •"Will I lose control?" - Explain trustee selection
• •"Is this tax avoidance?" - Explain legitimate uses
• •"Is it complicated?" - Explain ongoing requirements
• •"What are the costs?" - Be clear about fees

Be honest about limitations:

• •Trusts don't always save tax
• •Care fee planning has limitations
• •Deprivation rules can apply
• •Some trusts add complexity

Document your advice:

Always record why you recommended (or didn't recommend) a trust. This protects you and helps clients remember the reasoning.