Trusts & Legacy
Family and discretionary trusts
Flexible arrangements where trustees decide how benefit is applied, within the limits the deed sets.
A discretionary trust gives beneficiaries no fixed entitlement. Trustees hold the assets and decide who benefits, how much and when — but they decide within the four corners of the deed, not at will. The deed names the class of people who may benefit, sets out what the trustees may and may not do, and binds them to general trustee duties: to act in the beneficiaries' interests, to keep proper records, to invest suitably, and to hold the balance fairly between beneficiaries whose interests compete.
That is the appeal for a family whose circumstances are still moving. A fixed share written today has to guess at a grandchild's marriage, a child's business, a divorce, an illness or a change in the tax rules. Discretion lets the people you trust read the situation as it actually turns out. The cost of that flexibility is that decisions pass to the trustees, within whatever powers the governing terms give them, and that the arrangement has to be run rather than filed. Changing or unwinding a trust later may be difficult or costly, and a specialist should explain what would be possible before anything is signed.
Alongside the deed most settlors leave a letter of wishes. It explains the thinking — why one child was helped earlier, why a property should stay in the family if that remains sensible, what you would want considered if a beneficiary's circumstances deteriorate. It is a guide, not an instruction: it does not bind the trustees, does not override the deed, and cannot guarantee any particular outcome. Its value is that it gives trustees the reasoning they would otherwise have to guess at, and gives a family something to point to when a decision is questioned.
The administration is real. Trustees may need to file returns and account for Income Tax and Capital Gains Tax on trust income and gains, and Inheritance Tax can arise in more than one place — potentially when assets go in, at ten-yearly intervals, and when assets leave. Most express trusts also have to be registered with HMRC's Trust Registration Service and the record kept up to date; registration can apply even where the trust owes no tax, and some trusts are excluded, so the position needs checking rather than assuming. Professional trustees and accountants charge for this work, and those running costs belong in the decision from the start.
Discretion is also not secrecy. Trustees keep records precisely so their decisions can be explained and, if necessary, defended. Beneficiaries of a discretionary trust have no right to a particular payment, but they are not intended to be kept in the dark about the existence of the arrangement.
Questions worth putting to the specialist: which type of trust is being proposed and why that one; what you are giving up control of and whether you would still benefit; who the trustees are, what happens when one of them dies or stands down, and who replaces them; what the tax and reporting obligations look like in a normal year; and what the whole thing costs to set up and to run for the next twenty years.
Things worth considering
- Trustee discretion operates within the trust deed and general trustee duties, not without limits
- A letter of wishes guides trustees but does not bind them or guarantee an outcome
- Income Tax, Capital Gains Tax and Inheritance Tax may all apply, in different ways at different times
- Registration with HMRC's Trust Registration Service can apply even where no tax is due, subject to exclusions
- Set-up and ongoing administration costs should be weighed against the reason for using a trust
- Existing trusts benefit from periodic review — beneficiaries, trustees and rules all change
In plain English
Trusts: what they do, and what they do not do
A trust is a legal arrangement where trustees hold assets for the benefit of other people. Three roles matter: the settlor who puts assets in, the trustees who legally own and manage them, and the beneficiaries who benefit. A trust can be created during your lifetime or by your will.
Trusts are used where an outright gift would not work — a beneficiary who is young, a beneficiary who receives means-tested support, a second marriage where a survivor needs to live in a property but the children of the first marriage should ultimately inherit, or assets that need managing rather than handing over.
This describes the law of England and Wales. Scotland and Northern Ireland have different rules.
Step by step
What the process involves
- Step 1
Start with the intention, not the structure
What should happen, for whom, and when. The type of trust follows from that. Choosing a structure first is how people end up with something that does not do what they wanted.
- Step 2
Choose trustees carefully
Trustees have legal duties, must act in the beneficiaries' interests, and can be personally liable for getting it wrong. Two or more is usual; a professional trustee may charge.
- Step 3
Understand the tax treatment before signing
Trusts have their own Inheritance Tax, Income Tax and Capital Gains Tax rules. Many are subject to charges when assets go in, at ten-year intervals, and when assets leave. This is a reason to take advice, not a reason to avoid trusts.
- Step 4
Register where required
Most express trusts must be registered with HMRC's Trust Registration Service, and details kept up to date.
- Step 5
Run it and review it
Trustees keep records, file returns where due, and make decisions properly. A trust is an ongoing arrangement, not a document you file away.
Being straight with you
What this cannot do
- No trust can be presented as a guaranteed way to avoid Inheritance Tax. Treatment depends on the type of trust, the assets, the timing and your circumstances.
- No trust can be presented as a guaranteed way to avoid care-home fees. A local authority can treat a disposal made to reduce a contribution as a deliberate deprivation of assets and assess you as if you still owned it.
- Putting assets into a trust generally means giving up control of them. If you keep a benefit, the tax position usually changes.
- Trusts carry running costs, administration and possible tax charges that need weighing against the reason for using one.
- Cromwell Associates does not create or administer trusts and gives no tax advice.
Before you speak to anyone
Useful things to have ready
Gather or think about
- What you are trying to protect, and who from what
- Which assets you would be prepared to give up control of
- The beneficiaries, their ages, and anything that affects them such as means-tested support
- Who could realistically act as trustee
- Details of any trust that already exists, including its deed
Questions worth asking the specialist
- Which type of trust are you proposing and, in plain English, why that one?
- What are the tax consequences on creation, during its life, and when assets leave?
- Does it need to be registered, and who does that each year?
- What are the set-up costs, and what are the ongoing trustee and administration costs?
- What am I giving up, and what can I no longer do with these assets?
- How is this affected if my circumstances or the law change?
Ask us to explain any charges that would apply, and any remuneration we may receive for making an introduction, before you decide whether to proceed.
Sources
Official guidance referenced on this page
Enquire about family and discretionary trusts
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