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A trust is a way of managing assets (whether it is cash, investments, a share portfolio or property). A trust can be set up during your lifetime as part of your inheritance tax gifting strategy or can be created in your Will.

Will and trust solicitors

For help with setting up a trust, administering a trust or for advice on estate planning and preparing a Will call London based OTS Solicitors Wills and trusts team on 0203 959 9123 or contact us through our online enquiry form.

Our professional friendly team of Will and trust solicitors will guide you through the process of creating a trust and advise you on the best trust options to meet your family circumstances and your estate and inheritance tax planning objectives.

Definition of a trust

A trust is a legal arrangement where an individual transfers assets into the legal entity of a trust. The trust assets are administered by the trustees for the benefit of the beneficiaries of the trust.

Advantages of setting up a trust

Trusts can be created for a variety of reasons, for example:

  • To protect family members if you fear that a family member would spend an outright gift made in your lifetime or a legacy in your Will unwisely or that they are at risk of being made bankrupt;
  • To protect children by creating a trust in your Will so your trustees can manage the legacy and ensure that your children receive their inheritance when they are mature enough to appreciate it;
  • To protect family money from financial claims on separation or divorce. For example, if you are worried about giving your child a property to live in because you fear that their spouse could make a claim against it, you could place money or a property in trust. The trustees can then grant a licence so that your child and their partner and family can live at the property;
  • To control how money is handed down. For example, if you leave all your wealth to your spouse you may be concerned that if they re-marry then your children could lose out. If money is placed in trust your spouse could receive a life interest in the money. On their death, through the use of a trust created by you, the trust assets would then pass to your children or your chosen beneficiaries;
  • To enable you to take into account the family and personal circumstances of your beneficiaries. If you create a trust during your life or at your death in your Will, then your trustees can be authorised to exercise discretion and, for example, provide a child with more money if their need is greater than your other children or to defer a distribution if a beneficiary of the trust is going through a separation or divorce;
  • As part of an estate planning and inheritance tax strategy to minimise the amount of tax payable on your estate.

Types of trust

There are many different types of trust, such as:

  • Discretionary trust - This type of trust enables your trustees to exercise discretion over whether to distribute money and assets to a beneficiary or to a class of beneficiaries. A discretionary trust can be particularly helpful if you want to protect family money from divorce claims or if you have children from different relationships or with different needs. You may be concerned about placing too much control or discretion in the hands of your trustees. Your trustees can be provided with guidance about how you would like them to exercise their trustee powers over income or capital distributions by  preparing a document called a ‘letter of wishes’ setting out guidelines on how you want the trustees to exercise discretion;
  • Settlor interested trust - the person who puts money into trust can still benefit from the assets in a trust with a settlor interested trust;
  • Bare trust- Assets in a bare trust are held in the name of a trustee but the beneficiary has the right to all of the capital and income of the trust at any time once they are aged eighteen or over. This means the assets in the trust will go directly to the intended beneficiary. Bare trusts are often used in Wills where parents are concerned to protect young children;
  • Interest in possession or life interest trust- These are trusts where the trustee is obliged to pass on all the trust income (less expenses) to the beneficiary or beneficiaries of the trust. Interest in possession trusts are popular where a settlor wants a beneficiary, such as their spouse or partner, to have a regular income after the settlor’s death but they do not want them to be able to spend the capital or to give it away or leave it to a new spouse;
  • Accumulation trust - This type of trust is where the trustees can accumulate income within the trust and add it to the capital and assets in the trust;
  • Mixed trust – A mixed trust is a combination of more than one type of trust.

Trusts are taxed differently depending on the type of trust you decide to create. That is why it is essential to get the best legal advice before you decide on the type of trust you want to set up, whether that is during your lifetime or as part of your Will and estate planning.

Trust wording

When it comes to trusts, there is a whole new vocabulary to master. It helps to know some of the language that trust solicitors use, namely:

  • ‘Trust deed’ - the legal document that sets up the trust;
  • ‘Trust property’ - the assets placed by the settlor into the trust;
  • ‘The settlor’ - the person who puts assets into the trust. A settlor can also be referred to as the donor;
  • ‘The trustees’ - the people tasked with managing the trust. Trustees can be professionals or friends and family or a combination of the two;
  • ‘The beneficiaries’ - the person/s who the trust was set up to benefit;
  • ‘Life tenant’-  a beneficiary of the trust who may be entitled to income from the trust but not capital;
  • Capital distribution’ -  the release of cash or other assets to an individual beneficiary or class of beneficiaries;
  • ‘Income distribution’ - the release of interest or earnings from the assets held in the trust to either an individual beneficiary or class of beneficiaries;
  • Trust accounts’ - the document recording assets received into the trust and distributions made from the trust and payment of expenses.

The role of trustees

If you are contemplating setting up a trust the best advice is to choose your trustees with care as the trustees are the legal owners of the assets held in a trust although they owe fiduciary duties.

The role of a trustee involves:

  • Dealing with the trust assets according to the settlor or deceased’s wishes. The wishes can be contained in the Will, trust deed or a document called a letter of wishes;
  • Managing the trust (including investments) and paying any tax due. Many non-professional trustees will ask a professional to carry out the trust administration on their behalf but will approve trust distributions and the trust accounts.

A trustee’s fiduciary duties mean that they must act in the best interests of the beneficiaries and comply with the terms of the trust. The trustees must exercise reasonable care, make sure that the trust assets are distributed correctly, and act impartially towards all the beneficiaries of the trust. In some circumstances a trustee can be removed.

A trust – the best option for you and your family?

Trusts are a very flexible option if you want to make lifetime gifts or you want to leave large gifts in your Will. Not only can trusts be inheritance tax efficient they can also protect your loved ones. In an age where families are increasingly complex, with first and second marriages, children from previous relationships, and the rise in divorce, they can be the best option to protect your family and to give you peace of mind.

OTS Solicitors Wills and trusts team

To speak to a member of the London based OTS Solicitors Wills and trusts team about setting up a trust, for help with the administration of a trust or to discuss a Will or estate planning, please call us on 0203 959 9123 or contact us through our online enquiry form.

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