Complete Guide to Estate Planning Trusts

An Introduction to Estate Planning Trusts

Estate planning is about getting your affairs in order. It's the process of deciding how your assets will be managed and distributed after your death.

While a will is the most common document, many people choose to include trusts in their estate plans to provide greater control, protection and flexibility.

Estate Planning Trust: Key Terms

There are four key terms you should know related to trusts:

• The settlor: The person who puts assets into the trust and decides how assets should be used.
• The trustee: The person(s) who manages the trust and legally owns the assets held in it.
• The beneficiary: The person(s) who benefit from assets held in the trust.
• Trust deed: Often used to create a trust, it sets out the rules of the trust and names the trustees and beneficiaries.

What is an Estate Planning Trust?

An estate planning trust is a legal arrangement in which a person (the settlor) transfers assets to a third party (the trustee). The trustee manages the assets for the benefit of the beneficiaries.

The settlor appoints the trustees and outlines the terms of the trust using a legal document known as a trust deed.

Assets that you can put in a trust include:

• Property
• Investments
• Cash
• Life insurance policies
• Bank accounts

Why Use a Trust in Estate Planning?

Trusts offer benefits that a will simply cannot. They allow you to control how and when your assets are distributed and can offer long-term financial protection for your family members and loved ones.

Advantages of a Trust Fund

Some of the main benefits of a trust include:

• Avoid probate: Assets in a trust typically bypass the probate process, reducing legal delays.
• Privacy: Because a trust doesn't go through probate, a public process, your financial affairs stay private.
• Tax efficiency: Certain trusts can help reduce inheritance tax and capital gains exposure.
• Asset protection: Trusts can shield assets from potential creditors and legal challenges.
• Control and flexibility: A trust gives you greater control and flexibility over how your assets are distributed.

Revocable and Irrevocable Trusts

While there are various types of trusts, most fall into one of two primary categories: revocable and irrevocable trusts.

Revocable Trust

A flexible trust that you create during your lifetime. You can modify or revoke it at any time. While revocable trusts offer greater flexibility, they don't have the same tax benefits as their counterpart.

Irrevocable Trust

As the name suggests, you cannot change or revoke an irrevocable trust once it has been established. Assets added to the trust are removed from your taxable estate, meaning they are not subject to inheritance tax.

Common Types of Estate Planning Trusts

According to official statistics, 700,000 trusts were registered in the UK between 2018 and 2024. However, not all trusts are created equal.

There are various types of trusts. Choosing the right one depends on your goals, your assets, and your family situation. Here are the most common types of trusts.

Bare Trust

Bare trusts have the simplest structure among all trusts. The trustee holds the assets for the beneficiary, who has the right to both the assets and any income generated from them. These types of trusts are often used to hold assets for children until they reach the age of 18.

Interest in Possession Trust

The beneficiary has the right to the income generated by the trust right away, but not to the actual assets in the trust. This type of trust is commonly included in wills, as it allows a surviving spouse to receive a regular income while preserving the assets for the children.

Discretionary Trust

Trustees have full discretion over how to distribute income and capital among a group of potential beneficiaries. The trust deed will often state what powers the trustees have, but usually, their powers include:

• Deciding how much is paid out
• Frequency of payments
• Who gets what
• Conditions for payments

A common use for a discretionary trust is to offer flexibility in family estate planning, particularly when the needs of beneficiaries may change over time.

Accumulation Trust

With this type of trust, the income can grow (accumulate) and be added to the trust's capital. They may also be able to pay out income, as with discretionary trusts.

Non-Resident Trust

A trust where the trustees are not UK-resident for tax purposes. Different rules apply depending on the residency of the settlor and beneficiaries. As such, tax rules are complex for non-resident trusts. Visit GOV.UK to learn more or speak with an expert.

Mixed Trust

Mixed trusts typically combine elements and features of different kinds of trusts into one product. A mixed trust may be a suitable choice if you are seeking a more customised option.

How to Set Up an Estate Planning Trust

Setting up a trust requires careful planning and legal oversight to ensure it is fully effective. Here's a basic overview of how the process typically works.

Step-by-Step Guide

1. Select a trust: Choose the right type of trust based on your goals and assets.
2. Appoint a trustee: Select a reliable person, or you can appoint a company as your trustee.
3. Name beneficiaries: Clearly state who will benefit from the trust and under what terms.
4. Transfer assets: Fund the trust with property, cash, investments, or other assets.

Working with an estate planning professional can ensure that you have the proper documents in place and that your trust is legal and compliant.

Common Mistakes to Avoid

Common mistakes that people make when setting up a trust include:

• Choosing the wrong type of trust
• Failing to fund the trust properly
• Not reviewing or updating the trust over time

Choosing the Right Trust for Your Estate Plan

Selecting the right trust depends on your specific situation. Here are some key factors to consider:

• Estate value: Larger estates may benefit more from tax-efficient trusts.
• Family needs: Minor children and disabled dependents may need a specific estate trust structure.
• Tax goals: Use a trust that aligns with your tax planning goals to reduce inheritance and capital gains tax.
• Control preferences: Decide how much control you want to retain or give to trustees.

Tax Implications of Estate Planning Trusts

Trusts can have major tax implications—both positive and negative. Understanding how trusts are taxed is essential to effective planning.

Some key tax considerations are:

Inheritance Tax

The nil rate band (NRB) for inheritance tax (IHT) is £325,000. IHT applies to any portion of your estate that is above the NRB at a rate of 40%. Some trusts help you reduce or avoid IHT altogether by removing assets from your estate and reducing its value.

Income Tax

Income from the trust may be liable for income tax. The income tax rules and rates depend on the type of trust and its setup.

For example, in the UK, trusts pay income tax if income from the trust exceeds the tax-free amount (£500). For interest in possession trusts, trustees are responsible for paying income tax at the following rates:

• Dividend-type income: 8.75%
• All other income: 20%

Meanwhile, for accumulation or discretionary trusts, trustees must pay income tax at the following rates:

• Dividend-type income: 39.35%
• All other income: 45%

To learn more about how UK income tax affects different types of trusts, visit GOV.UK. Alternatively, speak to an expert to learn how income tax could affect a trust based on your circumstances.

Capital Gains Tax

Disposal of trust assets may trigger capital gains tax (CGT). Situations when CGT may apply include:

• When assets are put into a trust
• When assets are taken out of a trust
• When a beneficiary gets some or all of the assets in a trust

Trustees must calculate the total taxable gain to determine if they are liable for CGT. You can find more information at GOV.UK.

10-Year Charge

Trustees must pay a charge every 10 years if the trust contains relevant property above the inheritance tax threshold. This rule is called the 10-year anniversary charge.

The value of the property held in the trust on the day before the 10th anniversary determines the amount charged, and rates start at 6%.

Estate Planning Trusts for Expats

If you live abroad or have international ties, estate planning becomes more complex. For expats, key things to consider are:

• Cross-border assets: Trusts may be subject to different rules depending on where your assets are held.
• Domicile and residency: Tax treatment depends on the locations of you and your beneficiaries.
• Foreign trust rules: Some countries impose reporting or tax penalties on trusts.

Estate planning trusts can still be highly effective, but they must be carefully structured with international laws in mind to ensure their effectiveness.

To learn more, read our Guide to International Estate Planning for Expats.

Conclusion: Is a Trust Right for Your Estate Plan?

Trusts are powerful estate planning tools for those who want to:

• Protect assets
• Reduce estate taxes
• Support loved ones
• Avoid probate and delays

Estate planning and trusts can work hand in hand. However, setting up the right trust—and managing it well—requires expertise. If you're unsure where to start, speak to Holborn Assets.

We are a leading, award-winning financial services provider. Our team offers bespoke estate planning strategies to help you secure your legacy and ensure your loved ones are financially secure.

Book a free, no-obligation meeting and learn how we can help you.