Trusts: when they are worth the complexity

A trust separates legal ownership from beneficial ownership. Trustees hold assets and manage them for beneficiaries, according to the terms the settlor set.

They are useful instruments and they are also sold aggressively to people who do not need them. Not legal advice, and trust law and tax treatment differ enormously by jurisdiction.

The problems trusts genuinely solve

Beneficiaries who cannot manage assets. Minor children, someone with a disability affecting capacity, someone with an addiction, or someone whose circumstances make outright inheritance unwise.

A trust allows assets to be managed and released according to terms, rather than transferred outright at a fixed age.

Preserving means-tested benefits. An outright inheritance can disqualify someone from disability or care-related benefits. Specific trust structures exist in several jurisdictions to hold assets for such a person without affecting entitlement.

This is one of the clearest cases where a trust is genuinely necessary, and getting it wrong causes real harm.

Second families. Providing for a current spouse for life while ensuring that capital ultimately passes to children from a previous relationship.

Without a structure, leaving everything to a spouse means they can leave it to whomever they choose, and children from an earlier marriage may receive nothing.

This is a common and painful problem and it is exactly what a life interest trust addresses.

Controlling timing. Staged distributions, or discretion for trustees to respond to circumstances.

Business succession, where continuity matters.

Privacy, since in jurisdictions where wills become public after probate, assets in a trust may not appear.

Avoiding probate in jurisdictions where the process is slow or expensive. This is the principal driver of living trusts in some US states and is much less relevant elsewhere.

What trusts frequently do not do

Avoid tax automatically. Trust taxation is generally complex and frequently unfavourable, with income and gains within trusts taxed at high rates in several jurisdictions, and specific charges applying at intervals.

Some structures produce tax advantages in some circumstances. Assuming a trust reduces tax is a mistake, and anti-avoidance rules have narrowed the field considerably.

Protect assets from care costs. This is the claim most heavily marketed and most likely to be wrong.

Many jurisdictions have rules allowing authorities to look through transfers made to avoid care charges, sometimes without a time limit. Schemes marketed as protecting the family home from care fees have been the subject of regulatory warnings in several countries, and people have paid substantial fees for arrangements that did not work and that caused tax problems.

Be extremely sceptical of anything sold on this basis, particularly through seminars or cold approaches.

Protect against family provision claims in all cases. Courts in several jurisdictions can look at trust assets when considering claims.

The costs

Set-up costs, which are meaningful.

Ongoing administration — accounts, tax returns, trustee decisions — which continues for the life of the trust and which can run for decades.

Professional trustee fees where used.

Complexity for the beneficiaries, who may need advice to understand their position.

For a modest estate with straightforward beneficiaries, these costs frequently exceed any benefit.

Choosing trustees

Trustees have serious fiduciary duties and can be personally liable for breaches.

Look for the same qualities as in an executor, plus a longer time horizon — a trust may last decades, so trustees need to be replaceable and the deed needs to provide for it.

Consider whether a beneficiary should be a trustee, which is common and creates potential conflicts.

Professional trustees provide expertise and continuity at a cost, frequently charged as a percentage of assets.

The letter of wishes

Where trustees have discretion, a letter of wishes guides them without binding them.

It is not a legal document and it is enormously useful — explaining your intentions, describing the beneficiaries' circumstances, and setting out how you would want discretion exercised.

Update it as circumstances change. It costs nothing.

The selling problem

Trusts are sold at seminars, through cold approaches, and by firms whose business model depends on volume.

Warning signs: unsolicited approaches, seminars offering free lunch, claims about avoiding care fees or inheritance tax that sound too simple, pressure to sign quickly, and large upfront fees.

Regulators and professional bodies in several countries have issued warnings about this market.

Take advice from a solicitor you have chosen, who is not selling the product, and get a second opinion on anything substantial.

The test to apply

Ask what specific problem the trust solves, and what happens without it.

If the answer is concrete — my son could not manage money, my daughter would lose her benefits, my children from my first marriage would be disinherited — a trust may well be right.

If the answer is vague, or is about tax or care fees without specifics, be cautious.

This is general information, not legal or tax advice. Trust law and taxation differ substantially by jurisdiction and change frequently. Consult an independent qualified adviser.