How To Set Up A Trust Fund In The UK
Managing your money isn’t always easy, especially if you’re new to the UK banking system. You want to save for the future, but you also need to pay your bills and perhaps send money home. Maybe you also want to set money aside for certain circumstances, such as illness, starting a family, or unexpected expenses.
UK trust funds allow you to plan for the future by asking someone you trust to take control of your money or assets. They can only use the money in the way you decide — so setting up a trust fund in the UK ensures your money is used for what matters to you.
So how can you set up a trust fund in the UK? In this guide, you’ll discover how a UK trust fund works; the different types of trust fund; who can set one up; and whether it’s the right option for you and your family.
What is a trust fund and what are they for?
A trust is a legal arrangement that ensures your money can only be used in the way you intend. You appoint somebody (a trustee) to be in charge of your money. They can then use the money in the way you set out, usually for you or your children (the trust beneficiaries).
Trusts are a popular way to leave money for your children while they’re too young to manage it themselves. But you can also use trusts for other purposes. For example, you might set up a trust fund to ensure your family has enough money to care for you if you become ill.
Types of trust in the UK
There are 4 main types of trusts:
- Bare or simple trusts
- Interest in possession trusts
- Discretionary trusts
- Accumulation trusts
Each trust type can be used in a slightly different way — it depends how much control you want your trustees to have over your money.
Bare trusts
Bare trusts, also known as simple trusts, are the most basic type of trust. You put your money into the trust and assign your trustees and beneficiaries. When the beneficiary turns 18 (in England and Wales) or 16 (in Scotland), they’ll receive all the funds within the trust.
The trustee doesn’t have to do anything — they simply keep the money safe until the beneficiary is of age.
Interest in possession trusts
An interest in possession trust can be useful if you’re planning to include income-generating assets in your trust fund, such as property or company shares.
Any income or benefits generated by the assets in an interest in possession trust must be passed immediately to the beneficiary. For example, a beneficiary can live in a house in trust if they want or need to. You can decide how long the beneficiaries will benefit from this — it can be a specific time period, or for the rest of their life.
Discretionary trusts
A discretionary trust gives the trustees more control over the trust fund. They can decide when and how to distribute money or assets to the beneficiaries. In some cases, they can also decide which of the beneficiaries receive the money.
Accumulation trusts
If you want your assets to increase in value while they’re in trust, you can use an accumulation trust. Trustees can save and/or invest your money to increase the fund’s value. When the beneficiary reaches a specified age (between 18 and 25) they receive the full value of the trust.
It’s important to understand the difference between these types of trust, and how your money can be used. Certain types of trust (such as accumulation trusts) may not be Sharia-compliant, since they allow trustees to invest your money. You can normally add stipulations to your trust deed to control which types of investments are made with your money.
Who can set up a trust fund?
You don’t need a lot of money or high-value assets to set up a trust. Anyone with savings, property, business shares, or other assets can set up a trust.
There are costs associated with setting up a trust. You’ll usually need to ask a solicitor to draw up the trust agreement for you, which can cost more than £1,000. So you’ll need to decide if it’s worth the expense.
Should you set up a trust fund for your family?
Providing for your family’s future is one of the most popular reasons to set up a trust fund in the UK. But there are lots of great reasons to set up a trust, such as:
- Ensuring future generations of your family benefit from your estate
- You can avoid accidentally disinheriting your children (for example, if your spouse remarries after you pass on)
- You can ensure you’re cared for if you’re no longer able to manage your own money due to illness.
But trust funds don’t work well for everyone. There are certain drawbacks to setting up a trust, including:
- You’ll pay inheritance tax when money is transferred into a trust, and at certain intervals afterwards (usually every 10 years)
- You’re putting someone else in control of your money or property
- The tax rules are complicated if you appoint a trustee that doesn’t live in the UK
- It’s expensive to hire a solicitor — agreements made without a solicitor could be ambiguous or vague, making the trust agreement difficult to follow.
If you’re not sure if a trust is the right option for you, it’s best to seek impartial financial advice.
Do you have to be a parent to set up a trust?
Anyone can set up a trust and choose who will benefit from it. That means you can set up a trust for grandchildren, nieces and nephews, or even non-family members you’re close to. You can appoint the child’s parents as trustees, so they can manage your money when you’re no longer able to.
How to set up a trust for children or grandchildren
- Decide which assets you’ll put into the trust fund. You should know the value of each asset (such as property or shares).
- Appoint your trustee(s). This can be a person or a management company like a bank. As the name suggests, it should be someone you trust — as soon as the trust is set up, they’ll have control over the assets within it. Most advisors suggest appointing at least 2 trustees so no single person has control over the fund.
- Appoint your beneficiaries. Make a list of the people who will benefit from your trust. If there’s more than one beneficiary, you’ll need to decide how much each person will receive.
- Ask a solicitor to draw up a trust deed. This is where you can set the terms for the trust, including the type of trust you want to use. The deed should also include:
- What the fund must be used for
- How beneficiaries will be paid
- How the trust can be settled
- What age the beneficiaries will be entitled to the trust value (usually no older than 25)
- Any other instructions for how your money should be used.
How to save money for your family’s future
While trust funds are commonly used in the UK, they’re not always the best tool for intergenerational wealth planning. They can be expensive and difficult to navigate. Instead, you may want to consider investing in education, finding an ethical savings account, or setting up a rotating savings club that uplifts your entire community.
Learn more about ways to save for your family’s future.