A trust fund – or "trust" – is a legal arrangement whereby assets are transferred from one party to another. It's often used to pass on assets to somebody who isn't financially responsible – not in the sense of being "bad with money", but rather being too young or incapacitated, either mentally or physically.

Let's say a child's parents want to give them money for healthcare or a head-start on the property ladder. You could hand it over – but can you be sure that it'll be spent wisely? A trust is like a go-between, guarding the money against misuse. It can only be used according to the rules that the parents laid down in the trust deed.

And, contrary to popular belief, trust funds aren't just the preserve of people with vast reservoirs of wealth. They can be used in any situation where you want to give money to somebody to be accessed only under certain conditions.

In this context, the asset-holder is known as the "settlor". They draw up the trust deed under legal guidance and set out who the assets will go to and how they can be used.

The person set to receive the money is the "beneficiary" – for instance, a child who stands to unlock their university fees when they turn 18. This transfer of money is handled by the "trustee", whose job it is to make sure that the assets are used in accordance with the settlor's wishes.

Why do people set up trusts?

There are three main reasons to set up a trust.

The first is to support someone who may not be able to manage their money, whether through youth, a mental health condition or a learning disability.

The second is to put your own money aside to pay for your care in the event that one day you can't look after yourself.

Finally, trusts can be a means of reducing an inheritance tax bill. If you have an estate worth more than £325,000, you face a 40% tax rate on any assets above that threshold. By having the assets passed on during the settlor's life, the amount of inheritance tax due is decreased.

How do you set up a trust?

Trusts are legally binding, and so are usually set up with the help of an inheritance lawyer.

In law, the use of language is crucial to maximising the chance of fair outcomes. It's no different with trusts. Without legal advice, the wording of your trust deed may be imprecise and lead to problems down the line.

Who can act as a trustee?

Asking somebody to be a trustee is a big decision – after all, they're handling your assets. If it's a family member or close friend, you need to be as confident as you can be that they'll be reliable.

If you don't know somebody who is both appropriate for the role and happy to take it on, you can appoint a company as your trustee. This could be a bank or a law firm. Unlike Auntie Sue, they will charge you for the service.

This charge may seem steep – but like most legal fees, it's a way of future-proofing the arrangement. If the trust is worded in a way that leads to confusion or disappointment down the line, it could lead to further dealings with the solicitor, the cost of which would outweigh the original payment.

If the trust is for a disabled child, it can be worth looking for financial help from relevant charities.

What are the different types of trusts?

There are seven main types of trusts. Full details can be found on the Government website. Each one is taxed differently.

They are:

    • Bare trusts

    • Interest in possession trusts

    • Discretionary trusts

    • Accumulation trusts (in which trustees can add income to the trust's capital)

    • Mixed trusts

    • Settlor-interested trusts

    • Non-resident trusts

Bare trusts are typically used when the beneficiary is a child. When they hit 18 (in England and Wales) or 16 (in Scotland), the assets go directly to them. By contrast, an interest in possession trust tends to be used between married couples.

In these cases, the trustee is bound to the trust deed. With a discretionary trust, they're invested with more decision-making power. The trustee can decide what gets paid out, how often it's paid and under what conditions. These are sometimes used to pass assets to people who aren't capable of money management for whatever reason.

A mixed trust is what it says on the tin – a fund created from different types of trusts. Each part is subject to its own tax rules.

A settlor-interested trust is where the settlor (or their partner) stands to benefit from the trust. This could apply if, for example, someone sets up a discretionary trust to make sure they have money in the future.

Finally, there are non-resident trusts for people who aren't resident in the UK. The tax rules governing non-resident trusts are unusually complicated.

Why it's worth considering legal support

Whether you're looking to put aside money for a child, a relative who's unable to manage their own money or yourself, a trust fund can be a way to make sure your assets are handled responsibly.

Drawing up a trust deed is complicated. It requires legal expertise – as well as fluent legalese. For this reason, it can be advisable to instruct an inheritance lawyer to make sure the agreement is watertight.

Whatever your reasons for setting up a trust, sound legal advice will help to secure your assets and put them to good use in the future.

At Milners Law, we have an experienced, friendly team of inheritance lawyers. We pride ourselves on providing guidance without jargon – and we're transparent about our fees. Interested? Please don't hesitate to contact us for a free, no-obligation consultation.