The Role of Trusts in Estate Planning: What You Need to Know

When you're thinking about your legacy and who'll benefit from your hard work, trusts can be one of the most powerful tools at your disposal. Yet many people find them mystifying. Let's look at how trusts work in estate planning and explore which type might be right for you.

How trusts work in estate planning

Think of a trust as a legal container for your assets. You (the settlor) transfer ownership of assets, whether that's money, property, or investments, to trustees, who manage them for the benefit of your chosen beneficiaries. It's a three-way arrangement that gives you control over how your wealth is distributed, even after you're gone.

One of the biggest advantages is that you can transfer up to £325,000 into most trusts without triggering Inheritance Tax, and if you survive seven years, even larger transfers can escape the full 40% Inheritance Tax rate entirely.

Types of trusts for estate planning

The main types include bare trusts, discretionary trusts, and interest in possession trusts, each serving different purposes.

Bare trusts are the simplest type, where the trustee holds assets but must pass them to the beneficiary when they reach a specified age, typically 18. They're perfect if you're a parent or grandparent wanting to gift assets to minors while maintaining some control until they're mature enough to handle them.

Discretionary trusts give trustees the power to make decisions about how to use both trust income and sometimes the capital. This flexibility makes them ideal when you're uncertain about future needs - perhaps you've got a grandchild who might need more financial help than others, or beneficiaries who aren't quite ready to manage money responsibly.

Interest in possession trusts ensure beneficiaries receive income as it's produced (rental income, for example), though they don't control the underlying capital. They're particularly useful when you want to provide for a spouse during their lifetime while preserving capital for your children.

What type of trust is most suitable for estate planning?

There's no one-size-fits-all answer. Your choice depends on your family circumstances, tax situation, and what you're trying to achieve. For most types of trust, Inheritance Tax becomes due when transfers exceed the £325,000 threshold, so careful planning is essential.

Discretionary trusts offer maximum flexibility but come with more complex tax treatment. Bare trusts are simpler but give you less control once the beneficiary reaches adulthood. Interest in possession trusts strike a balance, making them popular for couples wanting to protect their children's inheritance whilst supporting a surviving spouse.

Protect your legacy

Estate planning with family trusts requires guidance to navigate the tax implications and legal requirements. Speak with a qualified financial adviser who can help you choose the right trust structure for your unique situation.

Estate planning, Tax planning including Inheritance tax planning and trusts are not regulated by the Financial Conduct Authority.