Should You Set Up a Trust to Protect Family Wealth?

Setting up a trust can protect family wealth and help provide for future generations and enable you to retain greater control over how assets are managed and passed on. However, they are not suitable in every situation and can carry significant legal, tax and administrative responsibilities.

For individuals with substantial or complex estates, blended family arrangements or beneficiaries who may need additional protection, a carefully structured trust can form an important part of wider estate planning. In this guide, Wills, Trust & Tax Partner Rowena Ridgway, explains why understanding how trusts work, the protections they can offer and the potential disadvantages is essential before deciding whether one is right for you.

What is a trust?

It is a legal arrangement for holding and managing assets, such as money, investments or property, for the benefit of named individuals or a class of potential beneficiaries. The person creating the trust, known as the settlor, transfers assets to trustees, who become responsible for managing them in accordance with the terms of the trust, on behalf of the proposed beneficiaries.

Trusts can be created during a person’s lifetime or by Will. Depending on the terms of the trust, they can help protect and preserve family wealth, provide for children or vulnerable beneficiaries, and control when and how assets are passed on. They may also form part of wider estate and tax planning, although the legal, tax and administrative consequences require careful consideration.

A trust may be appropriate where substantial or complex assets are involved, beneficiaries are young or vulnerable, family circumstances are blended or uncertain, or the settlor would prefer the transfer of wealth to be managed over a period of time rather than transferred outright.

Can a trust protect family wealth

When assets are placed into a trust, the legal ownership of the assets is transferred to the trustees. This can help protect assets from unexpected changes in circumstances, for example, if any potential beneficiary of a discretionary trust is subject to divorce or bankruptcy proceedings. As a potential beneficiary has a “hope” of inheriting, rather than a right to inherit.

However, this is a complex area, and legal advice must be sought for your own particular circumstances.

Blended families and vulnerable beneficiaries

A trust can also be a useful vehicle to provide for a spouse or partner without giving them the underlying capital outright, preventing sideways disinheritance. For example, the trust could provide for the spouse to receive an income for their lifetime or a right to occupy the home, with the capital passing to the settlor’s children later (usually on the death of the surviving spouse).

Trusts can also be set up to assist vulnerable beneficiaries. Discretionary trusts place wealth under the control of the trustees who can pay school fees, meet medical or care costs, contribute towards a home or release funds in stages rather than distributing a large sum at once. This can be helpful if any beneficiary is too young, lacks capacity or would struggle to manage money if inherited outright. Certain trusts for disabled people and bereaved children may qualify for special tax treatment. Again, the applicable rules are technical, and legal advice should be sought for your particular circumstances.

Ownership and the settlor’s control

A settlor gives up ownership of the assets transferred into trust by transferring the legal ownership to the trustees. The trust deed can define powers, beneficiary classes and decision-making safeguards, and a non-legally binding letter of wishes can guide trustees.

The settlor may sometimes serve as a trustee or retain limited powers, but excessive control or personal benefit can undermine the planning and produce adverse tax consequences. The arrangement must work in real terms as well as on paper.

Trustees should be trustworthy, financially capable, willing to act impartially and able to work together. They must understand that they are personally responsible for proper administration, investment decisions, records and tax compliance.

A professional trustee can add continuity, technical expertise and neutrality, especially for high-value, contentious or complex assets. A balanced panel of family and professional trustees may combine personal knowledge with independence.

Tax and financial consequences

The tax and financial consequences of a trust depend entirely on how the trust is structured. The Income tax rates differ between types of trusts, with discretionary trusts taxed at higher trust tax rates.

Trustees may need to pay Capital Gains Tax when they sell, give away or transfer trust assets that have increased in value and the annual exempt amount for a trust is half of that for an individual.

Inheritance Tax (“IHT”) must also be considered as an entry charge may be triggered when putting assets into lifetime trusts, or when assets leave a trust. Depending on the type of trust set up, there may be periodic IHT charges on the value of the trust every ten years.

When might another option be better?

Whether to set up a trust should be carefully considered in light of your own circumstances, your potential beneficiaries’ circumstances, from a tax perspective and considering the intended trust assets. A trust is not always appropriate, and your legal advisor will be able to take you through the pros and cons for you to make an informed decision.

Alternative options might include beneficiaries receiving their inheritance outright by Will which may be sufficient where beneficiaries are responsible adults, and no continuing management is needed. Alternatively, outright lifetime gifts could be considered if the person making the gift (known as the donor) is comfortable giving up the asset.

Depending on the aims and objectives of the settlor, exploring the possibility of life insurance, family investment companies or reviewing arrangements already in place such as a shareholder’s agreement, may achieve their aims without the use of a trust. Again, consideration should be given to the tax consequences of these alternative options and other factors such as the settlor losing control of the asset ought to be considered.

Can a trust be contested?

Yes, a trust can be contested. Challenges may concern the settlor’s capacity, undue influence, fraud, defective execution, uncertainty, the validity of asset transfers or an allegation that the trust is a sham.

Trustees may also face claims for breach of trust. Will trusts can be impacted by disputes over the Will or claims against the estate. Seeking the advice required, accurate records, correct execution and independent trustee decision-making all help reduce the risk of a challenge to your trust.

Speak to a Wills, Trusts & Tax Solicitor

A well-designed trust can provide flexibility, protection and continuity for families with complex assets or circumstances, but effective planning depends on choosing the right structure and understanding the consequences from the outset.

Our Wills, Trusts & Tax solicitors can advise you on whether a trust is appropriate for your objectives, how it should be structured and how it fits alongside your wider estate, succession and tax planning. Taking advice at an early stage can help ensure that your arrangements protect what matters to you while remaining practical for those who will manage and benefit from them in the future.

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