What a family trust actually does (and when it's worth it)

The word trust carries a lot of baggage. It sounds like something reserved for landed gentry or offshore wealth managers. In practice, family trusts are a straightforward legal tool used by many ordinary families in the UK.

They are not magic, and they are not right for everyone. But for families where the value of an estate is significant, or where there are specific concerns about how assets might be used or lost, a trust may be worth considering.

What a trust actually is

A trust is a legal arrangement in which assets are held by trustees for the benefit of one or more beneficiaries. The key point is that the assets are no longer legally owned by the person who created the trust. They belong to the trust.

The settlor is the person who puts assets into the trust. The trustees manage the assets. The beneficiaries receive the benefit. In a family trust, these roles often overlap: you might be both the settlor and an initial trustee, with your children as beneficiaries.

Discretionary trusts: the most common type for families

A discretionary trust gives the trustees flexibility to decide how and when the beneficiaries receive assets. Rather than leaving money directly to your children at a fixed age or in fixed shares, the trustees can respond to changing circumstances.

What a trust can protect against

• Divorce: assets held in a well-structured discretionary trust are generally outside the matrimonial pot if a beneficiary divorces, though this is not an absolute guarantee
• Creditors: trust assets are not directly available to a beneficiary's creditors in most circumstances
• Inheritance tax over time: once assets have been in a discretionary trust for long enough, they may be outside your taxable estate
• Loss of control: rather than a beneficiary receiving a lump sum at 18 under intestacy, the trustees can distribute at the appropriate time

What a trust cannot do

A trust is not a tax avoidance scheme. Transfers into a discretionary trust may attract an immediate inheritance tax charge if they exceed the nil-rate band at the time of transfer. The trust itself pays tax on income and capital gains.

A trust created solely to avoid care fees, or to deliberately defeat a creditor's claim, can be challenged.

The costs and compliance involved

Trusts must register with HMRC's Trust Registration Service and have their own tax returns. Trustees have legal responsibilities and can be held personally liable for breaches of trust. The cost of setting up a trust varies depending on complexity, but it is rarely cheap.

For a modest estate with no particular concerns about how assets will be managed or protected, a trust may add cost and complexity for limited benefit. For larger or more complex estates, the protection may outweigh those costs significantly.

Devonshire Wealth connects families with trust and estate planning specialists who can assess whether a family trust makes sense for your situation. Visit our trusts page to find a qualified adviser.