What is a trust? Trusts explained
What is a trust and how does it work?
A trust is a legal arrangement where you hand money, property or investments to people you trust to look after for someone else. It lets you pass on wealth while keeping control over how and when it is used.
Instead of giving something directly to a person, you give it to trustees, who manage it by your rules. A trust can be set up now or written into your will, starting when you die.
The three roles
- Settlor – the person who sets up the trust and puts money or property into it.
- Trustees – the people who manage it and follow your rules.
- Beneficiaries – the people who benefit, now or later.
You can also write a letter of wishes. It is not binding, but it guides your trustees.
The main types of trust
There are several types of trust, each working and taxed differently.
- Bare trust – held for someone until they can take control, usually at 18. Often used for gifts to children.
- Life interest trust – one person, often a surviving partner, can live in a home or receive income for life, then it passes to others. Common in blended families.
- Discretionary trust – trustees decide who benefits, how much and when. The most flexible, useful if someone is divorcing, in debt or not ready to manage money.
- Trust for a disabled person – provides for them without affecting means-tested benefits.
- Life insurance trust – the payout goes straight to your family, usually without waiting for probate and outside your estate for inheritance tax.
Why families use trusts
Trusts are not just for the wealthy. Many families use them to protect the people they love.
- Young children – money is managed for them, rather than paid in full at 18.
- Blended families – a partner is looked after for life, and children from an earlier relationship still inherit.
- Vulnerable people – someone with a disability, an addiction or money problems is protected.
- Divorce and debt – money in a discretionary trust is harder for an ex-partner or creditors to reach.
- Remarriage – your share of the home cannot pass away from your children.
Trusts set up mainly to avoid care fees can be challenged by the council, so plan early and for the right reasons.
How trusts are taxed
Trusts have their own tax rules. Getting the set-up right avoids surprise bills later.
- Putting money into most trusts during your lifetime can mean an immediate 20% charge on anything above your £325,000 allowance.
- Every ten years, many trusts pay a charge of up to 6%, and a charge may apply when money leaves the trust.
- Bare trusts are treated as belonging to the person benefiting, so these charges do not apply.
- Income and gains can be taxed at higher rates than for individuals.
- Most trusts must be registered with HMRC, even if no tax is due, and penalties apply for missing the deadline.
Choosing trustees and avoiding common mistakes
A trust is only as good as the people running it. Choosing the right trustees matters as much as choosing the right type.
Pick at least two organised people you trust, who are likely to be around for years. They can be family, friends or professionals.
Mistakes to avoid
- Using a DIY trust that does not fit your situation.
- Choosing trustees who do not get on.
- Forgetting to register the trust with HMRC.
- Still benefiting from what you gave away, so it still counts as yours.
- Never reviewing the trust as your family changes.
How PJH Estate Planning can help
PJH Estate Planning can explain whether a trust is right for you, whether to protect children, a vulnerable relative or your share of the home, and set it up properly in your will. Find out what you could face in your current situation with our free Estate Health Check: 10 quick questions that show any gaps in your plans. You can visit our offices, or we can visit you at home.
Sources
General information for England and Wales as at October 2026. Not legal, tax or financial advice.