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What Is a Trust Fund and How Does it Work?

When people refer to someone as a trust fund baby, they intend to use this term in a derogatory way to express that the person in question is too privileged and wealthy. While some trust fund babies might be in hog heaven long after they’ve inherited the wealth, most beneficiaries receive a moderate amount of money or other assets from trust funds.

But, what is a trust fund, and why do people invest in these accounts if they know they won’t bring the ultimate comfort to the beneficiaries? If you’re looking for an answer to these questions, this article will explain in great detail the purpose of a trust fund and how you or your friends and family may benefit from creating one.

What Is a Trust Fund and How Does it Work?

Surprisingly enough, the UK has a long history of trust funds. Many historians believe the first concept of what we now know as trust came from mediaeval England. As knights left to fight the war, it was vital to carry out the original owner’s will while appointing an empowered person to oversee the property.

In today’s world, a trust fund is what most people think of as an arrangement where one individual or organisation (the trustee) holds assets on behalf of another (the beneficiary). What’s more, trust funds have become increasingly popular in recent years and can be set up for many different purposes.

For example, some may need a trust fund to ensure their property stays within the family. Others, however, may use it to develop a multi-generational financial strategy.

Moreover, you could set it up if you want your trust fund money managed by someone else. But, it’s not uncommon either to use a trust to protect your assets from creditors or, in some cases, the taxman.

When you set up a trust fund, you appoint someone to be the trustee. The trustee is responsible for managing the assets in the trust for the beneficiary’s benefit. The trustee can be anyone you like, although it’s often a family member or friend. Of course, you can appoint a trustee company if you want your assets managed by professionals.

The trustee has a legal duty to look after the assets in the trust. However, they can’t just do what they’d like with them — trustees have to act in the best interests of the person benefiting from your trust fund. They can, however, make their own decisions about how to invest the money and what to do with it if the beneficiary applies for an early access grant.

As the name says, a beneficiary derives an advantage from the trust fund. A beneficiary can be one person or a group of people, and they don’t necessarily have to be related to you. For example, you could set up a trust fund for your children and grandchildren or a charity you support.

Trust Funds Benefits

Setting up a trust fund comes with various benefits. One of the most popular reasons for doing so is to ensure that your assets are passed on to your loved ones in whatever way you see fit.

Another advantage of using a trust fund is that it can protect your assets from being used to pay for care fees if you need to go into a care home. As the assets in the trust are not considered a part of your estate, they won’t be taken into account when means-testing for care fees.

Lastly, people set up trust funds to minimise the inheritance tax payable on their estate. It’s noteworthy that setting up a trust fund in the UK won’t exempt you from paying inheritance tax. But, if you decide to create one, you will get to enjoy some tax benefits.

There are, of course, some disadvantages to setting up a trust fund which you should bear in mind before making any decisions. One of the possible drawbacks that come to mind is that setting up and maintaining a trust fund can be costly. But, with careful planning, you can save money in a reasonable timeframe without emptying your pockets.

Types of Trust Funds

Bare Trusts 

A bare trust is one of the most common types of trust funds. It allows you to transfer ownership of an asset, such as property or shares, to the trustee, who then holds it until the beneficiary is of legal age to receive it. The main advantage of an inheritance trust fund is that it’s simple to set up and manage.

Bare trusts give beneficiaries the absolute right to the assets held within that trust, and they’re often used to pass assets to younger people. In this scenario, a trustee will manage the bare trust until the beneficiary is old enough to inherit the wealth.

Life Interest Trusts

Suppose you and your spouse hold your property as tenants in common or, in other words, own 50% each. In that case, when one of you passes away, the other person will inherit the life interest in the other 50%. The survivor may continue to live in your house for the rest of their life, but they’d still own 50% of the property. 

So, the life interest trust fund allows you to give someone the right to live in your property or to receive the income from your investments for their lifetime. Then, after their death, the assets will pass to your children or other beneficiaries. 

Still, people favour life interest trusts because they protect the assets from being used to pay for care fees. Life interest funds could also come in handy when addressing the conflicting issues which often arise when former spouses remarry.

Discretionary Trusts

The third type of trusts fund is a discretionary trust. These trusts grant the trustee discretion over how the assets in the trust are to be used for the benefit of the beneficiaries. Furthermore, there’s more room for flexibility with discretionary trusts, as they give you more control over how your assets are distributed.

Charitable Trusts 

Charitable trusts exist for the public benefit. They’re created primarily for charitable purposes and are regulated by the UK Charity Commission. 

Charitable trusts could be valuable to those wanting to leave a legacy. These trusts allow you to set aside money for both beneficiaries and a charity of your choice and have a say over income distribution while you’re still alive. Not to mention you’ll enjoy favourable tax benefits, such as an exemption from paying income tax, capital gains tax, and stamp duty.

Special Needs Trusts

The fifth and final common type of a trust fund account is a special needs trust. The assets in these trusts are used to benefit someone who has a disability. 

Special needs trusts allow people with a disability to live a more convenient life. Essentially, these legal agreements maximise the resources a disabled person may need without compromising their entitlement to state benefits. 

By setting up a special needs trust fund, you could enhance your friends’ or family members’ quality of life, as you’d provide sufficient funding for their accommodation, food, medical bills, and other necessities. 

As you can see, there are several different types of trust funds, each of which has its own advantages. Therefore, it’s essential to think carefully about what type of trust fund is right for you and your family before making any decisions.

How to Set Up a Trust Fund?

Setting up a trust fund can be a complicated process, so it’s vital to seek professional advice before making any decisions. The first step would be to choose a trustee responsible for managing the trust fund. More importantly, you can appoint someone yourself or hire a professional trustee company.

Then, decide what type of trust fund you want to set up. There are many types of trust funds, so be sure to choose wisely. 

Once you’ve decided on the type of trust fund, you need to determine what assets to put into it. You can choose between cash, property, shares or investments. The final step is to create the legal documents setting up the trust fund, including the trust deed and the declaration of trust.

The trust deed is the legal document that sets out the terms of the trust fund. Trust deeds include the trustee’s name, the name of the beneficiary, and the trust fund’s purpose. Similarly, a declaration of trust is a statement signed by the person setting up the trust fund which confirms that they have read and understood the trust deed and agree to be bound by its terms.

It’s critical to seek professional advice when setting up a trust fund, as several complex legal issues are involved in this process. A good solicitor can advise you on which type of trust funds can meet your demands and help you set it up effectively.

How Are Trust Funds Managed?

Trust funds are managed by the trustee, who is responsible for ensuring the assets in the trust fund are used by the terms of the trust deed.

The trustee has many duties, including:

  1. Investing the assets in the trust fund
  2. Keeping records of all transactions
  3. Preparing accounts
  4. Paying taxes
  5. Making distributions to the beneficiaries


The trustee must act in the beneficiary’s best interests and must not use the assets in the trust fund for their benefit.

If you appoint a professional trustee company to manage your trust fund, they will take care of all these duties on your behalf. However,  you are still ultimately responsible for the trust fund, so take the extra mile to ensure you understand what is happening with your money.

How Much Does it Cost to Set Up a Trust Fund in the UK?

The cost of setting up a trust fund in the UK will vary depending on the type of trust fund you want to open and the size of your estate. However, you can expect to pay around £2000–£3000 for professional advice and administration services.

Instructing a solicitor to open a trust fund in your name could be cheaper than £2000. Still, you’d want to hire someone with relevant experience in this field, meaning the total cost will likely go higher. In addition to that, before hiring a trustee company, you should research how much you would have to pay for trustee fees. As a general rule, most trustee companies receive 1–2% of the trust assets, so research your options before hiring a trustee.

How to Get Early Access to a Trust Fund?

If you need access to your child’s trust fund, for example, before it is fully matured, you may be able to apply for an early access grant. However, you may get approval only if your child is terminally ill and you need to use these funds for treatment.

If you ask for early access to a child trust fund account, you will need to make a claim for the child under the Special Rules in Disability Living Allowance. Those who didn’t make a claim under the Special Rules will be asked to provide evidence that their child is terminally ill.

On the other hand, some agreements allow you to exploit a loophole in this system. For example, you could ask for early access to a discretionary trust set up by one of your family members.

These trust fund types are usually backed by a letter of wishes that gives trustees a better idea of how to manage the trust fund in question. However, as the letter of wishes isn’t legally binding, you may want to petition the trustee and elaborate on why you need to get a hold of your assets early.

Trust Funds and Divorce in the UK in 2022

If you are getting divorced in the UK, you will need to consider what happens to your trust fund.

In general, the assets in a trust fund are divided between the husband and wife in accordance with the terms of the trust deed. However, this may not be what you want if you have set up a trust fund for your children.

Divorcees with a trust fund should seek legal advice from a qualified solicitor. If you’re preparing for the upcoming divorce, a solicitor will advise you on what will happen to your trust fund and provide a better explanation on how to protect it from the other party involved.

What Happens to a Trust Fund When the Beneficiary Dies?

If the beneficiary of a trust fund dies, the assets in the trust fund will usually be distributed to their heirs. However, if the terms of the trust deed state that the assets are to be used for a specific purpose, such as education or housing, the trustee will use them for that purpose.

It’s noteworthy that the trustee is still responsible for managing the trust fund and ensuring that the assets are used according to the terms of the trust deed after the beneficiary passes away.

Trust Funds and Taxes 

Trust funds are subject to UK taxes, including income tax, capital gains tax, and inheritance tax.

As a result, trustees must pay taxes on the income generated by the assets in the trust fund. Additionally, capital gains tax is charged on any profits made when the assets are sold, and the inheritance tax may have to be paid on the value of the assets at the time of the beneficiary’s death.

As stated earlier, trustees are responsible for paying any taxes due on the trust fund. All trustees should seek professional advice from a qualified accountant to ensure they’re complying with all UK tax laws.

If you’re wondering how much you’d have to set aside for taxes, you should know that the income tax rate is 20%. Similarly, the capital gains tax is charged at 15–20%, and the inheritance tax rate is 40%.

The Pros and Cons of Trust Funds

Trust funds can be a great way to protect your assets and pass them on to your beneficiaries. However, there are some drawbacks that you should be aware of before setting one up. So, let’s talk about the pros and cons of setting up a trust fund.

The main advantage of trust funds is that they usually provide asset protection. In other words, your assets within a trust fund are safe from creditors and bankruptcy proceedings. Moreover, trust funds may be a good investment as they can help minimise inheritance tax liability.

You may want to set up a trust fund to:

  • Avoid probate court
  • Keep your financial matters private
  • Maintain control of your assets
  • Prevent a conservatorship

However, trust funds can be complex and expensive to set up and maintain. You will need to appoint a trustee, and there may be ongoing costs, such as accounting fees. Trusts can also be challenging to change or cancel once they have been set up.

Other disadvantages include:

  • Finding a trustee can be challenging
  • Can’t access the funds early without the trustee’s permission
  • Additional paperwork

Wrap Up

A trust fund can be an excellent way to ensure your loved ones have access to necessary resources after you’re gone. By setting up a trust fund, you can provide for their education, make sure they have a roof over their heads, and give them the security that comes with knowing they will always be taken care of.

As you can see, there are many things to consider when setting up a trust fund, but with careful planning, your trust fund can be a great way to provide for your family.

Please note that this blog post is for informational purposes only and does not constitute legal or financial advice. You should always consult with a qualified professional before making any decisions about your finances.


How much money is in the average trust fund?

There is no definitive answer to this question as it depends on the size and complexity of the trust fund. However, it is not uncommon for trust funds to be worth millions of pounds.

How long does a trust fund last?

A trust fund can last for many years, even centuries. It all depends on how the trust fund is set up.

Can I withdraw money from my trust fund?

It depends on the terms of the trust deed. For example, some trust funds allow the beneficiary to withdraw money for their own use, while others stipulate that the beneficiary must use it for specific purposes, such as education.

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