Trusts Explained: A Guide for Estate Planners

Trusts are one of the most powerful tools in an estate planner's toolkit, yet they remain one of the most misunderstood areas of estate planning for both practitioners and clients. Understanding trusts thoroughly is what separates a basic will writer from a comprehensive estate planner, and it is what allows you to serve your clients properly while significantly increasing your revenue per instruction.

This guide covers everything you need to know about trusts as a practising estate planner: what they are, the main types used in the UK, when to recommend each one, inheritance tax implications, the role of trustees, how to draft them efficiently, and how to price your trust services.

What Is a Trust?

A trust is a legal arrangement where one or more people (the trustees) hold and manage assets on behalf of others (the beneficiaries), according to terms set out by the person who creates the trust (the settlor). The settlor transfers assets into the trust and sets the rules for how those assets should be managed and distributed.

In estate planning, trusts are most commonly created within a will (testamentary trusts) and come into effect upon the death of the testator. However, some trusts are created during the settlor's lifetime (lifetime trusts or inter vivos trusts).

Every trust has three essential components:

• The settlor: The person who creates the trust and places assets into it. In the case of a testamentary trust, this is the testator whose will contains the trust provisions.
• The trustee(s): The person or people responsible for managing the trust assets according to the trust terms. Trustees have legal ownership of the assets but must manage them for the benefit of the beneficiaries, not themselves.
• The beneficiary or beneficiaries: The person or people who benefit from the trust. Depending on the type of trust, beneficiaries might receive income from the trust, capital, or the right to use trust assets such as living in a property.

Why Do Clients Need Trusts?

Many clients initially come to you for a simple will. Your job as an estate planner is to identify when a trust would better serve their needs. Here are the most common reasons clients benefit from trusts:

• Protecting the family home: If a surviving spouse remarries or needs care home funding, a trust can protect the deceased's share of the property for the children.
• Providing for a vulnerable beneficiary: A child or adult with disabilities may need assets held in trust so they can benefit without losing eligibility for means-tested benefits.
• Controlling when beneficiaries inherit: Parents often do not want young adult children to receive a large inheritance outright at 18. A trust allows the trustees to manage the assets until the beneficiaries reach a more mature age.
• Protecting assets from divorce: Assets held in a properly structured trust may have greater protection if a beneficiary goes through a divorce.
• Managing inheritance tax: While trusts are not a magic bullet for IHT, certain trust structures can form part of an effective tax planning strategy.
• Providing for a second family: Blended families often need trusts to balance the interests of a surviving spouse against the inheritance rights of children from a previous relationship.

If you are only writing wills without discussing trusts, you are potentially leaving your clients unprotected and leaving significant revenue on the table. Most couples with property, children, or blended families will benefit from at least one form of trust.

Types of Trusts: A Detailed Breakdown

As an estate planner, you need to be confident with the following types of trusts. Each serves a different purpose, and knowing when to recommend each one is a core professional skill.

1. Bare Trusts

A bare trust is the simplest type of trust. The trustee holds assets for a named beneficiary, and the beneficiary has an absolute right to both the capital and income of the trust. The trustee is essentially a legal nominee with no discretion over how the assets are distributed.

When to recommend: Bare trusts are most commonly used when assets are being held for a minor who will inherit them absolutely at age 18. They are straightforward and carry minimal ongoing administration.

Tax treatment: For income tax and capital gains tax purposes, the income and gains are treated as belonging to the beneficiary, not the trustee. This can be advantageous if the beneficiary is a non-taxpayer or basic-rate taxpayer.

2. Interest in Possession Trusts

An interest in possession trust gives one beneficiary (the life tenant) the right to receive income from the trust or to use trust assets during their lifetime. When the life tenant dies, the trust assets pass to the remaindermen (the ultimate beneficiaries).

When to recommend: These trusts are ideal for blended families where the testator wants their spouse to benefit during their lifetime but ultimately wants the assets to pass to their children. They are also used to provide income for a surviving partner without giving them outright ownership.

Tax treatment: Where an interest in possession trust is created by a will (an immediate post-death interest), the trust assets are treated as part of the life tenant's estate for IHT purposes. Income tax is paid by the trustees at the basic rate, and the life tenant can reclaim any overpayment.

3. Discretionary Trusts

A discretionary trust gives the trustees full discretion over how the trust income and capital are distributed among a class of potential beneficiaries. No single beneficiary has an automatic right to anything. The trustees decide who receives what, when, and how much.

When to recommend: Discretionary trusts are extremely flexible and are suitable when circumstances may change over time. They are commonly used where the testator wants to provide for a group of people (such as grandchildren, including those not yet born) but does not want to specify fixed shares. They are also used for asset protection and to provide for beneficiaries who cannot manage their own finances.

Tax treatment: Discretionary trusts are subject to the relevant property regime for IHT, which means they can face entry charges (on lifetime transfers above the nil-rate band), periodic charges every ten years, and exit charges when assets leave the trust. Income tax is charged at the trust rate (45% on non-dividend income). These tax implications make it important to structure discretionary trusts carefully.

4. Life Interest Trusts (Right to Occupy)

A life interest trust, particularly a right-to-occupy trust, is commonly used in relation to the family home. The life tenant has the right to live in the property for the rest of their life, but they do not own it. When they die or move out permanently, the property passes to the ultimate beneficiaries.

When to recommend: This is one of the most frequently used trusts in estate planning. It is ideal for couples who want to ensure their surviving partner can remain in the family home, while protecting the property for their children. It is particularly important for couples who are not married, as they have no automatic inheritance rights.

Tax treatment: Similar to interest in possession trusts, where created by will the property is typically treated as part of the life tenant's estate for IHT purposes, which preserves the spouse exemption.

5. Property Protection Trusts

A property protection trust (sometimes called an asset protection trust) is specifically designed to protect the testator's share of the family home. The trust is typically created within a will and comes into effect on death. The surviving spouse or partner has the right to live in the property, but the deceased's share is held in trust for the ultimate beneficiaries, usually the children.

When to recommend: Property protection trusts are relevant for the majority of couples who own property jointly. They protect against the risk of the surviving spouse's share of the property being used for care home fees, claimed by a new partner if the survivor remarries, or spent or given away. This is one of the trusts you should be discussing with almost every couple you meet.

Tax treatment: As a testamentary trust created within a will, the property protection trust typically qualifies as an immediate post-death interest and is treated as part of the life tenant's estate for IHT purposes. This maintains the spouse exemption and the residence nil-rate band in most cases.

6. Vulnerable Person Trusts

A vulnerable person trust is designed to provide for beneficiaries who are classified as vulnerable, which in HMRC's definition includes people with disabilities and children under 18 whose parents have died. These trusts can be structured as either bare trusts or discretionary trusts, but they must meet specific conditions to qualify for favourable tax treatment.

When to recommend: Whenever a client has a beneficiary with a physical or mental disability, a long-term health condition, or a dependent child who may be orphaned. The tax advantages make these trusts significantly more beneficial than standard discretionary trusts for vulnerable beneficiaries.

Tax treatment: Vulnerable person trusts benefit from special tax treatment. Income tax and capital gains tax are calculated as if the income and gains belonged to the vulnerable beneficiary personally, which usually results in a much lower tax bill than the standard trust rates. This makes them significantly more tax-efficient than standard discretionary trusts.

Quick Reference: Choosing the Right Trust

The Role of Trustees

Helping your clients choose the right trustees is just as important as choosing the right type of trust. The trustees are responsible for managing the trust assets in accordance with the trust terms and in the best interests of the beneficiaries.

Key Trustee Responsibilities

• Acting in the best interests of the beneficiaries at all times
• Acting impartially between different beneficiaries
• Investing trust assets prudently
• Keeping accurate records and accounts
• Completing trust tax returns where required
• Registering the trust with HMRC's Trust Registration Service (TRS) where applicable
• Distributing assets according to the trust terms

Who Should Be a Trustee?

Advise your clients to choose trustees who are trustworthy, financially responsible, and willing to act. Common choices include family members, close friends, professional trustees, or a combination. For discretionary trusts especially, it is sensible to have at least two trustees. Clients should also consider appointing replacement trustees in case the original trustees are unable or unwilling to act.

Remind clients that being a beneficiary and a trustee simultaneously can create conflicts of interest, particularly in discretionary trusts. Where possible, having at least one independent trustee is good practice.

Trust Registration Service (TRS)

Since the expansion of the TRS requirements, most UK trusts (including many testamentary trusts) must be registered with HMRC. As an estate planner, you should make your clients aware of this requirement and consider whether you offer trust registration as an additional service. This is another revenue opportunity and a genuine value-add for your clients.

Inheritance Tax and Trusts

Inheritance tax is often one of the main reasons clients ask about trusts, so you need to understand the basics. Here are the key points:

• Testamentary trusts (created in a will): Assets passing into a testamentary trust on death are treated as part of the deceased's estate for IHT purposes. The nil-rate band (currently £325,000) and residence nil-rate band (currently £175,000) can apply in the usual way.
• Immediate post-death interests: Where a will creates a trust giving a surviving spouse an interest in possession, the spouse exemption applies, meaning no IHT is payable on the assets passing into trust.
• Relevant property trusts: Discretionary trusts are subject to periodic charges (every 10 years) and exit charges. The maximum periodic charge rate is 6% of the value above the nil-rate band, though the effective rate is often much lower.
• Nil-rate band trusts: Historically popular for IHT planning, these have become less common since the introduction of the transferable nil-rate band. However, they can still serve a purpose in certain circumstances.

It is important to note that trusts are not primarily IHT avoidance tools. Their main value lies in asset protection, control, and provision for beneficiaries. Any IHT benefit is secondary. Be cautious about marketing trusts as tax avoidance schemes; this is misleading and can damage your professional reputation.

Setting Up Trusts Using Willo

Willo makes trust drafting straightforward. The platform includes guided templates for the most commonly used testamentary trusts, including property protection trusts, life interest trusts, and discretionary trusts. The system walks you through the key decisions (trustees, beneficiaries, trust terms, powers) and generates professionally worded trust clauses within the will.

This means you do not need to draft trust provisions from scratch or maintain your own clause library. Willo handles the technical drafting while you focus on advising your clients. At just £150 per month with no per-document charges and no contract, you can draft as many trusts as your practice requires.

If you are new to estate planning and want to build your skills with trusts, Become an Estate Planner provides training resources, and Project Will has been supporting practitioners since 2009.

Pricing Your Trust Services

Trusts are a premium service and should be priced accordingly. The additional complexity, the value they provide to clients, and the time involved in explaining and implementing them all justify higher fees than basic will writing. As discussed in our guide on how much will writers earn, trusts are one of the key revenue drivers for estate planners.

When trusts are included as part of a comprehensive estate planning package, the total package fee should reflect the additional value. A couple requiring mirror wills with property protection trusts, four LPAs, and a severance of tenancy represents a package worth £1,500 - £2,500.

Common Client Questions About Trusts

Being prepared for these questions will help you explain trusts clearly and confidently to your clients.

"Will a trust protect our house from care home fees?"

This is probably the most common question you will hear. The honest answer is that a trust created during someone's lifetime specifically to avoid care fees can be challenged by the local authority under the deliberate deprivation of assets rules. However, a property protection trust created within a will, which comes into effect on the first death, protects the deceased's share of the property. The surviving spouse's share remains at risk, but at least half of the property value is preserved for the children.

"Do we need to tell HMRC about the trust?"

Yes, most trusts need to be registered with HMRC's Trust Registration Service. There are some exemptions, but it is generally safest to register. If the trust generates income or has a tax liability, the trustees will also need to complete an annual trust tax return.

"Can we be trustees of our own trust?"

In many cases, yes. For a property protection trust created on first death, the surviving spouse often acts as a trustee alongside one or more other trustees. However, for discretionary trusts where the surviving spouse is also a potential beneficiary, having independent trustees is advisable to avoid conflicts of interest.

"What happens if the trustees disagree?"

Trustees must act unanimously unless the trust terms say otherwise. If trustees cannot agree, they may need to seek direction from the court. This is why choosing trustees carefully and including appropriate provisions in the trust deed is so important.

Expanding Your Trust Knowledge

The trust types covered in this guide represent the most commonly used trusts in everyday estate planning. As your practice grows, you may encounter more complex trust situations involving inheritance tax planning, business property, agricultural property, or offshore assets. For these situations, it is important to know your limits and refer to specialist tax advisers or solicitors when appropriate.

For those looking to enter the profession or expand their skills, explore the resources available through Become an Estate Planner. You can also read our related guides on how to become a will writer and how to become an estate planner the Project Will way.