When creating an estate plan, there might be people you want to pass wealth to but they’re not in a position to manage their finances. Using a trust could provide a way to leave a vulnerable loved one assets and feel confident they’ll be effectively managed.
Trusts aren’t used as commonly as other ways to pass on wealth, such as gifting or leaving an inheritance directly. In fact, according to government figures, there were only around 733,000 trusts and estates registered on the Trust Registration Service as of March 2024. Yet, in some circumstances, a trust could present a valuable option.
There are many reasons why you might consider someone vulnerable or not want to pass on assets directly to them. You might consider using a trust if you want to pass on wealth to:
- A child
- A person at risk of financial abuse
- Someone who has made poor financial decisions in the past
- An adult who has a disability that affects their ability to manage finances.
A trust may allow you to improve the financial security of loved ones without them being responsible for managing assets.
A trust means someone you choose can manage assets on behalf of beneficiaries
A trust is a legal arrangement that you (the settlor) set up where assets are managed by a person or people (the trustee) for the benefit of one or multiple other people (the beneficiary).
So, while the beneficiary may benefit from the assets, it’s the trustee who will manage them. As the settlor, you can set out how and when you want the assets, and any income they generate, to be used.
For instance, if you want to pass on wealth to your grandchild, you might name their parents as trustees. You could state money may be withdrawn from the trust to cover educational costs and, once the child turns 25, they can withdraw and take control of the remaining assets.
Or, if you want to provide for a disabled adult, you might create a trust that states the trustee is to provide the beneficiary with a regular income for the rest of their life.
Crucially, as the settlor, you can set the terms of the trust so that it suits your goals.
You should note that there are several different types of trust and, once set up, it can be difficult or impossible to reverse the decisions you’ve made. So, seeking professional legal advice if you think a trust could be an option for you may be valuable.
3 important questions to consider if you’re thinking of using a trust
Before you set up a trust, it’s important to consider if it’s the right option for you. Here are three essential questions that may help you start to weigh up the pros and cons.
1. Who would act as the trustee?
Choosing someone to act as a trustee can be difficult, so you might want to consider who you’d ask.
You want a person you can trust to act in line with your wishes and in the best interest of the beneficiaries. However, you may also want to think about the skills they have – are they comfortable handling finances? Are they organised enough to manage the trust effectively?
You can choose more than one trustee, and set out whether you’d like them to make decisions together. You may also choose a professional to act as a trustee, such as a solicitor or financial planner, who would charge a fee for their services.
2. What would be the aim of the trust?
Thinking about the reasons for creating a trust is essential, as it might affect the type of trust that’s right for you and the terms you set out.
For example, a trust that’s simply holding assets until a certain date could be very different from one you want to use to preserve family wealth for future generations.
In some cases, you might find that an alternative option is better suited to your needs.
Let’s say you want to set money aside for your grandchild to access when they turn 18. A Junior ISA (JISA) allows you to save or invest up to £9,000 in 2024/25 tax-efficiently on behalf of a child. The money held in a JISA is locked away until they reach adulthood. So, it might be more appropriate and avoid the complexity a trust may add.
3. How much control would you give the trustee?
If you have a clearly defined idea about how you want the trust to operate, you might choose to set out exactly when the assets can be used. Alternatively, you may give more control to your trustee and allow them to use their judgment.
There isn’t a right or wrong answer, so focusing on what’s important to you is key.
When setting out terms or restrictions, you may want to spend some time weighing up different scenarios and the effect they might have.
For instance, if you want the trust to provide a defined income, you might want to consider:
- How the trustee should adjust the income for inflation
- Whether they can withdraw a lump sum in certain circumstances
- If there is a point you want the beneficiaries to take control of the assets.
Rigid restrictions could have unintended consequences.
Let’s say your loved one has an opportunity to purchase a property. Withdrawing a lump sum to act as a deposit could mean their day-to-day costs fall and provide greater security when compared to renting, but restrictions might mean this isn’t possible. Or if they face a medical emergency, accessing the wealth held in a trust could enable them to receive treatment quicker or provide more options.
Contact us to talk about your estate plan
A trust is often just a small part of an effective estate plan. If you’d like to discuss how you might pass on wealth to loved ones in a way that aligns with your goals and considers your wider financial plan, please get in touch.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.
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