Trusts: myths, reality and the bits that matter

Mention a trust and one of two things usually happens: eyes glaze over, or someone announces that trusts are only for the ultra-wealthy.

For solicitors advising on wealth, succession or asset protection, the job is to separate the practical benefits from the misconceptions. Here’s a look at some of the most common myths, followed by an honest assessment of where trusts can help and where they can create additional complexity.

Common myths about trusts

Are trusts only for wealthy people?

Perhaps the most persistent myth. In reality, trusts can be useful where assets are relatively modest. A life interest trust over a family home, a bare trust for a minor grandchild or a disabled person’s trust may all be appropriate depending on the client’s circumstances.

The real question is not how wealthy the client is, but what they are trying to achieve.

Are trusts mainly used to avoid tax?

Trusts can form part of legitimate tax planning, but they are far from a guaranteed tax-saving solution.

Since the Finance Act 2006, some trusts, particularly discretionary trusts, have been subject to less favourable tax treatment and may face 10-year periodic charges, exit charges and higher rates of income tax and capital gains tax. The idea that assets can simply be ‘put into trust and the tax disappears’ is a myth.

Can a trust be changed after it is created?

Many clients assume that creating a trust is a one-way door. While some trusts must be irrevocable to achieve their intended effect, powers of appointment, trustee discretions and, in some circumstances, court-approved variations can provide flexibility.

The key is understanding from the outset what can and cannot be changed.

Do trustees have complete control?

Trustees don’t acquire unrestricted freedom over trust assets. They owe fiduciary duties under both the trust instrument and legislation, particularly the Trustee Act 2000.

Trustees must exercise reasonable care, act impartially between beneficiaries, comply with their investment duties and always act in the interests of the beneficiaries. A breach of those duties can result in personal liability.

How trusts can help with estate planning

Used appropriately, trusts can be a highly versatile part of a solicitor’s planning toolkit.

Asset protection and vulnerable beneficiaries

Trusts can help protect beneficiaries from external risks and, sometimes, from their own financial inexperience. They are often used where a beneficiary is vulnerable, lacks capacity, is susceptible to undue influence or is not yet ready to manage significant wealth outright.

By allowing trustees to control when and how assets are distributed, trusts can provide ongoing support while helping to preserve assets for the beneficiary’s long-term benefit. Disabled person’s trusts may also attract favourable tax treatment in appropriate circumstances.

While no trust offers absolute protection, a well-structured trust can provide valuable safeguards and flexibility.

Succession planning

Trusts allow clients to control when, how and on what terms assets pass between generations, rather than relying on the all-or-nothing approach of outright gifts.

Flexibility

A well-drafted discretionary trust enables trustees to respond to changing family circumstances, evolving legislation and beneficiaries’ needs over time.

Business succession

Trusts can assist with the orderly transfer of business interests, helping to avoid fragmented ownership and maintain continuity of management. They may also complement other succession planning tools, such as shareholders’ agreements and family investment structures.

Potential inheritance tax benefits

Certain structures, particularly where business property relief or agricultural property relief is available, can continue to offer valuable inheritance tax planning opportunities when implemented as part of a wider strategy.

Common problems and drawbacks of trusts

Trusts can be useful, but they come with responsibilities, costs and administration.

Cost

Establishing a trust involves legal fees. Ongoing administration may include the preparation of trust accounts, tax returns, professional advice and trustee meetings. For smaller estates, those costs may outweigh the benefits.

Tax charges

Discretionary trusts within the relevant property regime can be subject to 10-year periodic charges of up to 6% on assets above the nil-rate band, together with proportionate exit charges when assets leave the trust. Trustees may also face income tax and capital gains tax rates at the highest marginal rates.

While these liabilities can often be anticipated and planned for, they must be factored into any assessment of whether a trust is appropriate.

Compliance and reporting

The Trust Registration Service (TRS) requires most UK trusts, including many non-taxable trusts, to be registered. Trustees must also comply with anti-money laundering requirements and associated due diligence obligations.

Administrative burdens are rarely the most exciting aspect of trust management, but they cannot be ignored.

Loss of control

Where assets are transferred into an irrevocable trust, they cease to belong to the settlor in legal terms. Attempts to retain excessive control may undermine the effectiveness of the arrangement and could attract scrutiny from HMRC or the courts.

A trust cannot be genuinely irrevocable while allowing the settlor to continue treating the assets as their own.

Complexity of trust administration

Trusts inevitably add an additional layer of legal and administrative complexity. In some cases, simpler solutions, such as outright gifts, nominations or joint ownership arrangements, may be entirely sufficient.

Sometimes the simplest solution is the right one.

Trusts as a practical planning tool

Trusts are neither magic wands nor legal monsters. Used appropriately, they can be highly effective planning tools, offering flexibility, protection and control. Used unnecessarily, they can create cost, administration and complexity.

The solicitor’s role is to identify when a trust genuinely adds value, explain both the advantages and drawbacks and ensure the structure supports the client’s objectives.

When approached in that way, trusts become what they are meant to be: practical tools for achieving specific goals, rather than sources of mystery, disappointment or unnecessary complication.

With tax legislation, regulation and family circumstances continually evolving, clear and tailored advice remains the most valuable tool of all.