131- Trusts (What Are They And Do You Need One?)

The word 'Trust' brings many things to mind, and often the truth of what a Trust is, and what they can be used for, is lost in translation. 

In this episode Benjamin explains the role of Trusts in financial planning so that you can understand some of the scenarios in which they may/may not be required. 

Jargon free and straight to the point as always. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:11

Hello Friday, hello money nerds, and welcome to Heads Up on Money. Hope we are all well, and that time of the week it's rolled around again. I previously have been talking about some more generalist concepts when it comes to your financial planning, but I thought I would go back and do a little bit of a technical dive in this week's episode, where I'm talking about trust vehicles. And what exactly is a trust and what are they used for? Trusts is perhaps one of the most confusing terms in the wonderful world of financial planning. They mean different things to different people. So in typical heads up on money style, I'm going to try and keep it short and sweet, but you'll leave this week's episode with a much sounder knowledge of what trusts are and if they may be relevant to your financial plan now or in the future. But before I get into the goody bag that is this week's episode, it's a quick call out from me to say if you're enjoying heads up on money in 2026 or have done in previous years, miraculously started this journey two and a half years ago now, which is absolutely nuts that we're 130 plus episodes in. Cannot believe it. How much more can we say on financial planning? But there's lots to say, Money Nerds, there's lots to do. Our job is never done. Getting the financial education out to you is really something I absolutely love every week, and I hope my enthusiasm comes across in the podcast. So if you are enjoying it, if you are enjoying me getting on my soapbox every Friday, do leave me a comment, like, subscribe to the show, and share it with all your family and friends. Okay, there, that's me done my piece. Let's get into this week's episode on trusts. So typically when you mention the word trust, this sparks up lots of ideas for people. Some of them may be completely confused ideas, some maybe a little bit true. For most people, it might be the image of a trust fund, perhaps bringing to mind things in American sitcoms with trust fund babies and posh people living off mum and dad's trust fund. That's often the image that comes to mind when I frame this with some clients and ask them what does a trust mean to you. So I have really wanted to do this episode of Heads Up on Money for some time now, and it's fallen down the pecking order due to more topical things that are coming up that I wanted to provide some commentary on, but it's always been in the back of my mind because it always seems to be one of those confusion areas for clients when I have a chat to them about it. So we're going to get into it in this episode, high level, of course, without going into the weeds here, because honestly, you could do several hours on this. And by way of a disclaimer, I am not a qualified solicitor. I am not an expert on the intricacies of trust law or trust taxation, but I can give you my perspective of where I've seen them used in financial plans for my clients and the main salient features of what trusts are, which hopefully will give you a bit of confidence to understand whether or not they may be relevant to you, or indeed you may have trusts as part of your financial plan at the moment. So if I'm going to start with a high-level summary of what exactly is a trust. So the very simplistic idea I can give you is that a trust is an independent vehicle in its own right. Think of this as a box, if you will, similar to the analogy I've used in previously around things like a pension wrapper is a box, the rules around a pension, an ISA is a box, which is an ISA box with certain tax rules, tax privileges. Well, a trust can lean on that metaphor, if you like, in that a trust is its own entity. It's its own legal entity, it's also its own taxation entity. That's important to mention because certain flavors of trust will have differing tax rules and tax privileges applicable to them. I'm not going to get into the weeds of that today, but that is something to keep in mind is that a trust almost is a if we use the box analogy, or if it resonates more with you, it's almost like an independent person. Although, of course, by definition it is not a real person, but it has its own rules. So if something goes into a trust, then that changes the entire landscape. So the question therefore is why exactly would someone use a trust? Where do they fit into personal financial planning? Well, at a strategic level, trusts are typically used to reallocate ownership of certain assets. So people may use a trust vehicle in order to have some future direction about where wealth might go to future generations. So if we think about this without the use of a trust vehicle, if you pass away and your pension, say goes to your spouse, and they later pass away and it goes to whoever's nominated in their pension nomination forms, let's say their children, goes to their children when they die, and those children perhaps are currently married, they have a messy divorce, there's potential for that wealth eventually to become spread out at that level between their child and the partner of said child, so it almost has no guaranteed direction as to where the wealth may flow in the future, and of course that's part and parcel of life. You never know what's around the corner, you can't plan for endless what-ifs, but some people use trusts as a way of having more ownership over your wealth in the future. So, in this instance, perhaps the wealth would go into a trust vehicle, a trust box, let's call it that, and within that trust vehicle there would be greater direction and greater say as to what happens to that wealth in the future. So some people use it primarily for that, which is more often referred to as bloodline protection. You maybe heard that phrase in terms of you know exactly where your wealth is going to end up and who it's going to go to in the future because you've got some say over where that wealth goes. Some use it in a similar vein just to have a bit more control over their wealth. Typically, you know, trusts may be used to hold money for certain individuals who maybe do not have the level of seniority to manage the wealth themselves. Trusts are typically used for minors in the UK, being defined as non-adults who do not have the capacity to take ownership of the funds at their age. So a trust vehicle is a way of controlling those funds until they are of an age where they can take ownership of that. And for some people, it can be more black and white, and they may use trusts as a way of doing some tax planning, primarily around the lens of inheritance tax planning. Now, when it comes to understanding trusts, there are certain parties, certain names of individuals that are key to understanding how they work in practice. Primarily, there will be three terms you should be aware of: that is the settler, the trustees, and the beneficiaries. So the settler is the individual who effectively creates the trust or gifts the money into the trust, if you like. The trustees are the people who are kind of responsible for the trust, they manage the trust, they follow the wishes of the settler. So the settler may say, upon my passing, if they create a trust in their will, they want their money to go to their adult children at a time when they need the money to get onto the property ladder. So the settler will outline some wishes to the trustees who have a legal responsibility to act in the interests of the settler. Now moving away from the trustees, the final parties are the beneficiaries, the end people who will have some entitlement to the trust proceeds. Now I'm being really careful with my words here because the term entitlement can be a bit of a misnomer because you may be entitled to certain elements of the trust, or there may be no entitlement at all, depending upon how the trust structure is set up, but but making this really plain, really simple, you've got the settler who creates the trust, you've got the trustees who manage the trust, and the beneficiaries who are the ultimate people who can benefit from the trust proceeds. As I said, I'm not a qualified solicitor, and if you're looking into the real bones of trust law, you really want to be seeking a solicitor who has the STEP qualification, STEP, and I believe from memory, Society for Trusts and Estate Practitioners, I think. But from a financial planning angle, the scenarios where I see trusts crop up quite a lot are individuals perhaps who are, let's say, cognizant of the fact that they may have too much wealth for their financial life plans, they're gonna achieve everything they want to, and they have some surplus capital at their disposal, which in its current form may attract inheritance tax. So they say, okay, let's start making some gifts to get some of this capital out of our estate and into the estates of next generations, etc. However, the caveat is that they're not quite comfortable enough to make a full outright gift. They don't want to gift, let's say, a hundred grand to their 25-year-old son because they're concerned what will they do with it. So trusts come into this in that it's a way to get the inheritance tax clock ticking. So the idea of this seven-year clock commencing when when you make a gift, and that gradually tapers out of your estate up till seven years when it's typically exempt from your estate completely. Now, trusts don't change the details of how that works, you're still making a gift, and the seven-year clock typically still applies. The difference is, of course, that you're gifting it into this independent vehicle, which has some say over how the proceeds are passed on in the future. There's more protection there than in the previous route. I've also seen some clients use them because they have some concerns around divorce, of children perhaps in the future, issues around creditors, and they don't want wealth to be falling into the estates of beneficiaries in the future who have credit risk or debts, whatever it might be, they don't want to muddy the waters in that regard, and so trusts can provide a bit of added protection in that regard. So, recapping here, a settler would set up a trust primarily to do some tax planning, but it may just be because they want a bit more control over their wealth and how that will be redirected subsequently on their passing or even when they're still alive by the trustees. So the settler will make a gift into the trust, and normally what I would always encourage a settler to do is outline a letter of wishes to accompany the trust so that it can be articulated and relied upon in the future if they were no longer here to say, I want this funds to be used to help my daughter get onto the property ladder after she finishes university, or I want the funds to help pay for my grandchildren's university schooling, whatever it might be. It really helps direct the trustees as to what the actual wishes of the settler are. Now, as I said earlier, a trust is not a universal term, there are different flavours of trusts, and within each of these subsets they may have differing rules around entitlements, differing tax rules. So I really don't want to get into the weeds here because I could lose you money nerds, but headline summary, the most common trusts you will come across will be a bear trust, that's B-A-R-E. A bear trust is typically the most simple type of trust because trust vehicle in this instance is pretty much invisible. And what I mean by that is the beneficiary will have absolute entitlement to the funds at the relevant age, perhaps. Any income and gains will be taxed on the beneficiary. It's a lot simpler from a taxation perspective because the actual trust itself doesn't have its own tax regime and complicated tax rates that some other trusts do have. So it's very simple. And you can think of this commonly as things like a junior ISA. So a junior ISA in many ways is a bear trust. Parent may set this up, they'll put some money into junior ISA for their child children, and when their children are of a relevant age, 18, to assume tight entitlement to those trust funds, they become theirs. So that's the the simplest way to think about a bear trust. Now, the more common trust that people use because a bear trust is fairly limited, because one beneficiary in this instance will have entitlement to the funds at a certain age, and there's limited planning you can do. Once you set up the bear trust, it's very hard to redirect that to other people in the future. So most people use what's called a discretionary trust. So by that definition, trustees have discretion over the income and the capital within that trust, and no beneficiary has a fixed entitlement. The trustees ultimately can say where the money goes and when it goes to them. Keeping in mind they will try and follow the wishes of the settler as laid out in the expression of wishes or the letter of wishes form. Now, discretionary trusts have their own tax regime, they're more akin to being an individual in their own right, and there may be tax implications within the trust itself. Again, not getting into the complicated nuances of trust and taxation law in this episode, Money Nerds, but just be aware when you set up a discretionary trust, there are other things you need to consider other than the intricacies of how the trust will work and who the beneficiaries are and who the trustees are. There could be wider tax implications in setting up that trust. So we'd always encourage you to seek legal and financial advice when you are considering this as part of your own financial plans. One of the places where I've talked about trusts before in the podcast is around the matter of life insurance policies and setting these up under trust. And this kind of follows in a similar idea because the premise of that is so that the proceeds can go to the right people at the right time in line with your wishes, and in the case of perhaps a life assurance policy that pays out on your death, it ensures that the policy proceeds go into this independent trust vehicle so that that's out with your estate rather than it falling into your estate. And I've seen this a few times in my career, more than I'd care to admit, where life assurance has been taken out as a product to mitigate an inheritance tax charge, and the proceeds only serve to exacerbate the very inheritance tax liability it was trying to circumvent. So, bottom line is trusts come into their own also in that regard. Now it can seem that trusts seem to be, you know, a great vehicle to have. So if you gift money to a trust and later you run out of personal wealth and you need access to that money again, you can't just take that back. It's a very final binding decision. So you again need to go into this with your eyes open. And it's really important that you go into this with legal advice, financial advice, tax planning advice so that you're aware of the pros and cons. Because trusts, don't get me wrong, can be great vehicles in the right circumstances, but do not underestimate some of the complexity that comes with them. And of course, what you then need to do is think hard about the trustees, the people that you trust by the definition of the word, trust. You trust with your financial future or the financial future of children or future generations. It's a big responsible job and it's not to be taken lightly. Often setting up a more complex trust will need a solicitor to draft a trust deed so that the trust is binding and is in accordance with the stipulations of the law. So you will need a solicitor to draft the trust deed. Keep that in mind. Now, when it comes to life assurance proceeds, as I said in previous episodes of the podcast, this is a bit more simplistic, generally speaking, unless you've got some sophisticated planning needs, in which case you should seek legal advice and have a bespoke trust deed drawn up. Tricky sentence that one. But for life assurance proceeds, generally speaking, you can get a form from the insurer that you have your life assurance plan with, an off-the-shelf trust form, as we call it, and they can be completed fairly easily and massive reward. I've talked about this in a previous episode of the podcast around the simple things you can do to get on top of your finances that require zero or close to zero effort from you, but can result in masses of tax savings. Well, that's a big one, is you should be setting your life assurance proceeds to go into a trust arrangement for inheritance tax planning, really, really important, but not also for inheritance tax planning, but for getting the right money to the right people at the right time. That's what a trust vehicle does. So if we try to bring all of this together in some coherent way, trusts, you know, they are really complex and there's a lot of confusion regarding them. They mean different things to different people, but in essence, if we strip away all the waffle in the jargon, a trust is just another independent vehicle you can use in your financial planning, and within that trust, depending upon what flavour of trust it is, it will have its own tax rules, its own legal rules, but generally speaking, they are used to do a bit of tax planning in your own name or to have a greater say over the direction and control of your wealth in the future. That's really what it all comes down to. Whether trusts are needed in your own financial plan, of course, will come down to your own circumstances, the complexity of your financial affairs, the level of wealth you have, are you perhaps within the net of inheritance tax, or is it not a concern for you? That may determine whether trusts are relevant to you or not. Also, how harmonious is your family setup? How much confidence do you have in the financial management of your children, your grandchildren in the future? Are you worried about divorce or bloodline protection in your wealth? Again, this is all unique to you, and it's the same as any part of your financial planning. Is everybody is unique, they'll have their own anxieties, apprehensions, or worries. But when it comes down to it, trusts can form a really critical part, an element of many people's financial plan. So I hope in this episode I've tried to dispel some of the confusion, some of the myths regarding trusts. Gonna try and keep it to under 20 minutes if I can. But if you have any questions, as always, money and urge you know where you can find me. But hopefully, this is a great starter for 10 on trusts. Okay, so I'm gonna wrap it up there. If you do want to do any more reading on this, there is an absolute abundance of information out there on trusts, but be careful what you read, money nerds, because some of it may not be relevant to you. My parting words would be if you have sophisticated financial affairs that warrant the use of more specialist trust arrangements, really seeking legal advice on this is worth its weight in gold. You do not want to get this stuff wrong because, as I said, trusts are legally binding. If you set this up incorrectly in minor cases, it can cause a mass of financial and legal headaches, and in worse cases, it could mean the difference between your wealth ending up in the right hands in the future or the wrong hands. So, again, seeking the right advice on this is something I would really encourage you to do. Do not scrimp on the legal cost that this requires because it is a complex area. But anyway, let's wrap this one up, keeping it light as always. A bit of a technical deep dive this week, but I hope it's been beneficial. I hope it's been educational for you, because as I said at the start, trusts is one of those words that just stirs up lots of confusion to different people. So I'm hoping I've tried to give you a bit of education on the main features today. Of course, there's lots more I could cover, but that's not really what Heads Up on Money is all about. I want to give you just enough information so that you feel a bit more financially empowered and a bit more positive about your own financial futures. So I've been Benjamin Mitchell. This has been Heads Up on Money Personal Finance Friday. I'll catch you next Friday as always, and in the meantime, I hope you have a nice week. Whatever you're up to, whatever you're doing. Stay safe, and I'll catch you in a week.