Three ways a living trust could help keep funds secure for loved ones

If you’ve worked hard to build a meaningful financial legacy for your loved ones, you’ll want to protect it and ensure they benefit from their inheritance.

Perhaps you’ve written a will that sets out how you’d like your estate distributed when you pass away.

Of course, having a valid, up-to-date will is a crucial part of estate planning. However, trusts are an often overlooked and underused financial planning tool that could help you take control of your wealth during your lifetime.

Keep reading to find out how living trusts work and discover three ways they could help you keep funds secure for your loved ones.

How living trusts work

A living trust is a legal arrangement that allows you to protect and control your assets during your lifetime and determine how they’re distributed after your death.

This type of trust is sometimes called an “inter vivos” or “lifetime” trust, because it’s established whilst you’re still alive, rather than created under a will (a testamentary trust).

There are many reasons why you might want to put some of your wealth in trust, such as providing for dependents or managing the complexities of inheritance if you have a blended family.

Any assets you place in trust no longer belong to you – they belong to the trust. As such, someone of your choosing – a “trustee” – is responsible for managing the assets in the trust. They must do this in line with the best interests of the “beneficiary” – the person you set the trust up for.

Different types of trust to explore and consider

There are two broad categories of living trusts – revocable and irrevocable.

A revocable trust can be modified after it’s been created. For example, you could remove beneficiaries and designate new ones. In contrast, an irrevocable trust typically can’t be modified, or it’s likely to be very difficult to do so.

Living trusts are most commonly revocable, as this allows the person who set it up (the “grantor”) the flexibility to make changes during their lifetime.

Within these categories, there are several types of trust to consider, including:

Bare trust – Also known as a “simple trust,” your trustee(s) hold the assets until the beneficiary(ies) are entitled to them. This is age 18 in England, Wales and Northern Ireland, and age 16 in Scotland, provided they are mentally capable.

Discretionary trust – Your trustee(s) have the authority to decide how to distribute the trust’s income and capital among the beneficiaries. This flexibility may be useful if you want to protect funds for beneficiaries who may not currently be ready or able to manage them, for example, young children or grandchildren.

Interest in possession trust – The beneficiary or beneficiaries you name in the trust are entitled to receive income generated by the trust assets for a fixed period or for their lifetime. Your beneficiary(ies) will need to pay Income Tax on the income they receive from the trust.

Mixed trust – This allows you to combine elements from different trusts to create one that meets your specific needs.

As you can see, each type of trust meets different needs. Moreover, this is not an exhaustive list; there may be other options that are worth exploring.

A Financial Planner can help you navigate the complexities of choosing a trust and ensure that you select the most appropriate one for what you want to achieve.

Three key benefits of using a living trust to pass on your wealth

There are various reasons why you might choose to set up a living trust.

1. Mitigate a potential Inheritance Tax bill

As the assets you place in a trust no longer belong to you, they are not usually included in your estate for Inheritance Tax (IHT) purposes. Assuming an irrevocable trust that the settlor is excluded from benefitting from.

As such, living trusts could help you pass on more of your wealth to loved ones by mitigating a potential IHT bill.

However, it’s important to note that trust assets are not entirely exempt from IHT.

In 2025/26, you can pass on up to £325,000 (the nil-rate band) without paying IHT. If the value of your estate – including the assets held in trust – exceeds certain IHT thresholds, you could face an IHT charge.

Depending on the type of living trust you choose, you may have to pay:

• 20% IHT when you set up the trust
• 6% IHT every 10 years, less the £325,000 IHT allowance
• Up to 6% when the trust is closed or assets are removed.

Learn about our Inheritance Tax planning support.

2. Avoid the probate process

Any assets you leave to your loved ones in your will must go through probate. This is the legal procedure for administering your estate after you’re gone.

Unfortunately, the probate process can be lengthy and costly. Which? revealed that the number of applications taking longer than one year rose by 134% between 2020 and 2023.

In contrast, assets held in a living trust are not subject to probate when you pass away. As such, your beneficiaries could immediately access the trust assets, potentially saving them considerable stress and financial difficulties.

3. Protect your assets

The assets you place in a living trust belong to the trust rather than an individual. As a result, the trust funds are protected from creditors and legal claims if your named beneficiary(ies) fall into debt, become bankrupt or get divorced.

In other words, a living trust could provide a valuable way to safeguard your legacy for future generations.

A Financial Planner can help you set up a living trust that aligns with your needs and goals

There’s a lot to consider when setting up a living trust, and the process can be complex.

It’s also important to be aware of the potential drawbacks of putting some of your wealth in a trust, such as the loss of control over your assets and the potential costs.

That’s why it’s crucial to seek professional financial advice. We can help you decide if a living trust is the right choice for you. If so, we can offer the guidance you need to navigate the complexity of setting up and managing a trust and avoid common pitfalls, such as underestimating tax liabilities.

Our Financial Planners will listen carefully to what you want to achieve and ensure that your trust arrangements meet those needs.

Get in touch

Email us at enquiries@pen-life.co.uk, or call 01904 661140.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts or will writing.