What is a trust and how does it work?
A trust is a legal arrangement where one or more people (called trustees) hold and manage assets on behalf of someone else (the beneficiary). The person who creates the trust is known as the settlor.
Think of it as a way of separating ownership from benefit. The trustees are responsible for looking after the assets and acting in the best interests of the beneficiaries, according to the rules set out by the settlor.
There are several types of trusts, but the most common include:
- Bare trusts – simple arrangements where the beneficiary has the absolute right to the assets
- Discretionary trusts – trustees decide when and how to distribute assets
- Life interest trusts – someone receives income from the trust during their lifetime, with the capital passing to others after death
Trusts can be used for a range of purposes, from managing assets for children to complex inheritance tax (IHT) planning.
However, they do come with administrative responsibilities and tax considerations. Depending on the type of trust, there may be implications for income tax, capital gains tax and inheritance tax, which is why professional advice is crucial.
Why do people use trusts to protect wealth?
Trusts are often seen as a way to ‘ring-fence’ wealth and ensure it’s passed on in a controlled and tax-efficient way. Common reasons include:
- Controlling how and when assets are inherited, especially useful for young or financially inexperienced beneficiaries
- Protecting vulnerable individuals, such as someone with disabilities or mental health conditions
- Shielding family wealth from divorce settlements or bankruptcy claims
- Mitigating inheritance tax, particularly for high-value estates
- Planning for second marriages and blended families, ensuring children from a first marriage still receive an inheritance
A well-structured trust can offer peace of mind that your legacy will be handled exactly as you intend. But that doesn’t mean it’s the right solution for everyone.
Should I put my home in a trust to avoid care home fees?
This is a question we’re asked frequently, and it’s easy to see why. Many people are worried about having to sell the family home to fund long-term care in later life.
One strategy you may have heard of is placing your home into a trust, typically a discretionary trust, with the idea that it’s no longer considered part of your estate for means-testing purposes. On the surface, it sounds like a clever workaround.
However, local authorities have the power to look at your financial decisions and assess whether you’ve deliberately tried to reduce your assets to avoid paying for care. This is known as deliberate deprivation of assets. If they believe the home was put into trust to avoid care costs, they can still include its value in their assessment.
Other potential pitfalls include:
- Loss of control – You may no longer be able to sell or mortgage your home if it’s held in trust
- Inheritance tax complications – The home may still be part of your estate for IHT purposes, depending on the trust structure
- Legal and administrative costs – Setting up and maintaining the trust can be expensive and time-consuming
At Chilvester, our view is that placing your main residence into trust purely to avoid care fees is rarely advisable.
When trusts make sense for family wealth protection
That’s not to say trusts don’t have their place – they do, particularly in the right circumstances.
You might consider a trust if:
- You want to control how your wealth is passed on, especially if there are concerns about a beneficiary’s ability to manage money
- You have minor children or grandchildren you want to provide for in the future
- You have a blended family and want to protect your children’s inheritance
- You’re engaging in long-term IHT planning, especially if other allowances (like the nil rate band or residence nil rate band) have already been used
- You hold business or agricultural assets and want to pass them on tax-efficiently
In these cases, a trust can be a valuable part of your overall estate planning strategy, but it should always be implemented with expert legal and financial advice.
Trusts aren’t always the best tool
While trusts offer flexibility and control, they come with downsides that are often overlooked:
- Complexity – Trusts must be carefully structured to meet legal and tax requirements
- Costs – Professional setup fees and ongoing management costs can add up
- Tax implications – Some trusts are taxed at higher rates, particularly discretionary trusts, which can reduce the overall benefit
- Reporting requirements – Trustees may need to register the trust, file tax returns, and provide regular updates to HMRC
For many families, a trust is simply more than they need and there may be simpler, more cost-effective solutions available.
What should you do instead?
Rather than jumping straight to a trust, it’s usually better to take a step back and look at the bigger picture.
A thorough financial and estate planning review can help identify the best way to achieve your goals, whether that’s preserving family wealth, reducing IHT, or protecting against care costs.
Other options worth considering include:
- Lifetime gifting, using annual exemptions and potentially exempt transfers
- Updating your will to ensure your wishes are legally binding
- Using pension funds, which can often be passed on free from IHT
- Taking out life insurance, written in trust, to cover future tax liabilities
Ultimately, trusts should be seen as one tool in the box, not the only solution.
Talk to us about protecting your family’s wealth
Trusts can be incredibly useful in the right situations, but they’re not a one-size-fits-all answer. In many cases, other planning strategies can be more effective, flexible, and tax-efficient.
At Chilvester, we help individuals and families across Chippenham, Newbury and Bristol make informed decisions about protecting and passing on their wealth.
Whether you’re concerned about care fees, inheritance tax, or providing for the next generation, we’ll help you find the solution that fits your goals.
Book a free, no-obligation consultation with one of our expert advisers today.
