Trusts are a powerful legal tool that allow you to manage, protect and distribute your assets according to your wishes. They play an important role in estate planning, especially if you want to support loved ones, reduce inheritance tax, or leave a legacy to charity.
But with several different types of trusts available in the UK, understanding how they work and which one is right for your situation can be confusing. This article explains the main types of trusts used in the UK and how each serves a different purpose.
What Is a Trust?
A trust is a legal arrangement where a person (known as the settlor) places assets into the care of trustees, who are responsible for managing those assets for the benefit of specific individuals or groups, known as beneficiaries.
The trust can contain money, property, investments, or other valuable assets. It operates under a trust deed, a legal document that sets out how the trust should be run.
Trusts are commonly used in wills and estate planning but can also be created during a person’s lifetime for tax, financial, or personal reasons.
Why Set Up a Trust?
People use trusts for a variety of reasons:
- To protect assets for future generations.
- To reduce inheritance tax liability.
- To ensure family members are supported in a controlled way.
- To provide for someone who is unable to manage money themselves.
- To make a donation to a charitable cause.
- To manage family wealth in complex family arrangements (e.g. second marriages, blended families).
The Main Types of Trusts in the UK
1. Family Trusts
A family trust is a broad term usually used to describe any trust set up to benefit family members. These are often discretionary or interest-in-possession trusts and are designed to:
- Protect wealth across generations.
- Manage funds for children until they are older or more financially responsible.
- Ensure assets pass in line with the settlor’s wishes.
- Family trusts are ideal for people who want long-term control over how their estate is handled or who have children from different relationships.
Key features:
- Can be set up in your lifetime or as part of a will.
- Helps avoid inheritance disputes.
- May provide some protection from care home fees.
2. Charitable Trusts
A charitable trust allows you to set aside assets or money for a charitable purpose. They are usually created through a will or living trust and are often used by people who want to leave a legacy to a charity close to their heart.
These trusts must benefit the public and meet certain legal requirements set out by the Charity Commission in England and Wales.
Key features:
- Offers inheritance tax benefits (gifts to charity are tax-free).
- Can reduce the taxable value of your estate.
- Enables ongoing charitable giving after death.
- Charitable trusts can also be used to set up long-term endowments or foundations in your name.
3. Discretionary Trusts
A discretionary trust gives your trustees the power to decide how, when, and to whom the trust assets are distributed. This is one of the most flexible types of trusts and is particularly useful where:
- Beneficiaries are young or vulnerable.
- You’re unsure about future circumstances.
- You want to protect assets from bankruptcy, divorce, or irresponsible spending.
Key features:
- Trustees have full control over distributions.
- Beneficiaries don’t have an automatic right to the assets.
- Offers protection and adaptability for changing family needs.
- Because the trustees have discretion, this type of trust is commonly used in family and estate planning scenarios.
4. Life Interest Trusts
A life interest trust (also known as an interest in possession trust) provides a named person with the right to receive income from the trust or use its assets during their lifetime. Once they die (or the term ends), the assets pass to another beneficiary.
These trusts are often used in wills to ensure a surviving spouse or partner can remain in the family home, while ultimately preserving the value of the estate for children or others.
Key features:
- Protects the surviving spouse or partner.
- Safeguards assets for children from previous relationships.
- Can reduce care home fee exposure and inheritance tax in some cases.
How to Set Up a Trust in the UK
To set up a trust, you should:
- Choose the type of trust based on your goals.
- Decide who will be your trustees and beneficiaries.
- Work with a will writer to set up your trust
- Transfer the chosen assets into the trust.
- Register the trust with HMRC if required under the Trust Registration Service (TRS).
Trusts are versatile estate planning tools that help you manage and protect your wealth for future generations, charitable causes, or loved ones in need. In the UK, common types include family trusts, discretionary trusts, charitable trusts, and life interest trusts each with unique benefits and levels of control.
Choosing the right trust depends on your individual circumstances, your family structure, and your long-term financial goals. With the right advice, a trust can offer peace of mind, tax efficiency, and a lasting legacy.
Got Questions? – Contact our team or read our more detailed, what to do when someone passes away guide.
Disclaimer:
The information provided in this blog is for general informational purposes only and does not constitute legal, financial, or tax advice. While we aim to provide accurate and up-to-date information, laws and regulations may change, and the application of legal principles can vary depending on individual circumstances. You should not rely solely on the information in this article when making decisions regarding estate planning, Wills, or trusts. We strongly recommend speaking with a qualified estate planning professional or solicitor before taking any action.