Trusts in-depth

A trust fund is a legal way for you to remove money from your estate for inheritance tax purposes and leave it to another person, without increasing the value of the beneficiary’s estate and causing a large tax bill in the future. When used correctly, trust funds allow you to efficiently pass money from one person to another.

If you don’t use trusts funds, your estate could be liable for inheritance tax, as could the estate of your children because your money is passing down the generations, and each generation will have to pay inheritance tax on your money. 

The ‘settlor’ is a person who is putting their assets into a trust fund and has the trust documents drawn up. Their chosen assets are put into the trust, and they can also act as a trustee if they wish, alongside another trustee. A settlor cannot be the beneficiary of the trust because they would still have use of the asset.

The ‘trustee’ looks after the assets on behalf of the settlor in the best interests of the beneficiaries. The trustee has to follow the rules of the Trustee Act 2000 meaning that the trustee has rules that govern what they can and cannot do with assets.

The ‘beneficiary’ is the person who has the ultimate benefit of the asset in the trust fund, the beneficiary must ask the trustee to access the asset in the trust, to ensure the beneficiary is using the asset the way the settlor intended.

There are two different types of trust funds that are used in death planning — one is a trust contained inside a will, the other is a pilot trust. Another form of trust is a living trust. Your LR Estate Planning expert can explain the different types of trusts and advise which is best suited for you.