Planning for the future is one of the most responsible steps you can take for your loved ones. Among the options available for safeguarding family wealth and providing for future generations is the establishment of an inheritance trust fund. A trust fund allows you to control how and when your assets are distributed after your death, while also offering potential tax advantages and asset protection.
At Blackstone Solicitors, we specialise in estate planning and the creation of trusts for clients across England and Wales. In this article, we explain what an inheritance trust fund is, the different types of trusts available, how to set one up, and the key considerations involved in the process.
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What Is an Inheritance Trust Fund?
An inheritance trust fund is a legal arrangement where assets are transferred into a trust and managed by appointed individuals (called trustees) for the benefit of others (called beneficiaries). The person creating the trust is known as the settlor.
The trust is governed by a trust deed or will trust provisions, which set out the rules for managing and distributing the assets. Trusts can be created during a person’s lifetime (lifetime trusts) or take effect upon death (will trusts).
Trust funds are commonly used to:
- Protect assets for young or vulnerable beneficiaries
- Preserve family wealth across generations
- Minimise exposure to Inheritance Tax (IHT)
- Safeguard assets from divorce, creditors, or poor financial management
- Ensure that specific wishes are followed after death
Types of Inheritance Trusts
Several types of trust structures may be used to manage an inheritance. The most appropriate will depend on your circumstances, objectives, and the needs of your intended beneficiaries. Common types include:
- Bare Trusts
In a bare trust, the beneficiary has an immediate and absolute right to the trust assets. The trustee holds the assets in their name, but only for the benefit of the named beneficiary.
These are often used for young children, with the assets being handed over when the child turns 18. There are no special tax advantages, but the trust is simple to administer.
- Discretionary Trusts
A discretionary trust gives trustees full discretion over how, when, and to whom income or capital is distributed from the trust. The settlor can provide guidance via a letter of wishes, but the trustees are not legally bound to follow it.
Discretionary trusts offer flexibility and can protect beneficiaries from poor decision-making, external pressures, or changing life circumstances. They can also be effective for asset protection and estate planning.
- Interest in Possession Trusts
This type of trust gives a named beneficiary (known as the life tenant) the legal right to receive income from the trust assets for life, while the capital is preserved for another beneficiary (the reversionary beneficiary) after their death.
Interest in possession trusts are often used to provide for a spouse while ensuring that capital ultimately passes to children from a previous marriage.
- Trusts for Disabled or Vulnerable Beneficiaries
Special trusts can be created to provide for beneficiaries with disabilities, allowing them to receive financial support without affecting their entitlement to state benefits. These trusts also benefit from favourable tax treatment.
How to Set Up an Inheritance Trust Fund
Setting up a trust fund requires careful planning and a clear understanding of legal and tax implications. The process typically involves the following steps:
Step 1: Define Your Objectives
Before creating a trust, it’s important to clarify your goals. Consider:
- Who are your intended beneficiaries?
- Do you want to restrict access to the assets?
- Are there concerns about financial responsibility, divorce, or creditors?
- Are you aiming to reduce your Inheritance Tax liability?
- Do you want the trust to take effect during your lifetime or on death?
At Blackstone Solicitors, we work with you to define your objectives and recommend the most suitable trust structure.
Step 2: Choose the Right Type of Trust
Based on your goals, our legal team will advise you on the appropriate type of trust. For example:
- If your primary concern is tax efficiency and flexibility, a discretionary trust may be best.
- If you want to ensure a surviving spouse is supported but preserve capital for children, an interest in possession trust may be more suitable.
- If a beneficiary has additional needs, a vulnerable person’s trust may be required.
Each trust has different legal and tax implications, so choosing the right structure is essential.
Step 3: Appoint Trustees
Trustees are legally responsible for managing the trust in accordance with its terms and acting in the best interests of the beneficiaries. You can appoint:
- Trusted family members or friends
- Professional trustees (such as solicitors or financial advisers)
- A combination of both
It’s crucial to choose trustees who are reliable, financially astute, and capable of acting impartially. Trustees have a fiduciary duty and must comply with legal obligations under the Trustee Act 2000.
Step 4: Draft the Trust Deed or Will
The trust deed is the legal document that establishes the trust and sets out the rules for how it will operate. If you’re creating a trust upon death, the terms will be included in your will.
Key elements include:
- The identity of the settlor, trustees, and beneficiaries
- The type and purpose of the trust
- Powers and duties of the trustees
- Conditions or restrictions on distributions
- Duration of the trust (many are set up for 80 years or until a specific event)
Our solicitors at Blackstone Solicitors will draft the trust documentation to ensure that it is legally valid, tax-compliant, and tailored to your individual requirements.
Step 5: Transfer Assets into the Trust
Once the trust is established, the next step is to fund it. This may include:
- Cash or investments
- Property or land
- Shares in a family business
The method and timing of the transfer will depend on whether it is a lifetime trust or a trust established on death. Stamp Duty Land Tax (SDLT), Capital Gains Tax (CGT), and IHT may apply, so professional advice is essential.
Step 6: Register the Trust
Most trusts must be registered with HMRC’s Trust Registration Service (TRS). This is a legal requirement and helps to ensure transparency and compliance with anti-money laundering regulations.
Registration must include details of the trustees, settlor, and beneficiaries. Changes to the trust must also be kept up to date. We handle the registration process for our clients to ensure full compliance.
Tax Implications of Inheritance Trusts
Trusts are subject to a complex tax regime in the UK, and the tax treatment depends on the type of trust and the nature of the assets involved. Common taxes include:
- Inheritance Tax (IHT) – Depending on the value of the assets and type of trust, there may be an IHT charge on creation, during the life of the trust (the 10-year charge), or on exit.
- Income Tax – Trustees may need to pay tax on income generated by trust assets.
- Capital Gains Tax (CGT) – Disposal of trust assets may trigger CGT liability.
Despite the tax considerations, trusts can still be a tax-efficient way to manage inheritance, particularly with proper legal and financial planning.
Conclusion
Setting up an inheritance trust fund is a valuable way to protect your assets, provide for your loved ones, and ensure your estate is distributed according to your wishes. However, trusts must be carefully planned, correctly structured, and professionally administered to be effective.
At Blackstone Solicitors, we offer expert advice on all aspects of trust creation, from initial planning to drafting and registration. Whether you’re looking to support young children, protect a vulnerable family member, or plan for future generations, our team can help you build a secure and legally robust inheritance strategy.
How to Contact Our Wills and Probate Solicitors
It is important for you to be well informed about the issues and possible implications of setting up a trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.
To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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