What is a Trust Fund and How Does It Work?

People often think that trust funds are reserved for the ultra-wealthy and high net-worth individuals. In reality, they’re a flexible and practical arrangement for anyone who wants to protect their assets and provide for loved ones. As Wills & Trust Solicitors, we have been helping families in St Albans and beyond set up trusts for over 25 years, so let’s dive into what a trust fund is, how they work, and why they could be a great option for you.

What exactly is a trust fund?

A trust fund is a legal arrangement where someone (the “settlor”) puts assets—like money, property, or investments—into a “trust.” The trust is then managed by a “trustee” on behalf of the people who will benefit from it, known as the “beneficiaries.”

It’s essentially a way to make sure your wishes are followed and your assets are used in the way you intend, even when you’re no longer around.

How do they work for everyone involved?

When understanding how a trust fund works, there are three key parties to consider:

The Settlor

This refers to the person setting up the trust. You decide what assets go into the trust and lay out the rules for how they’re managed.

The Trustee

Think of the trustees as the managers of the trust. They’re responsible for looking after the assets and making decisions in line with the instructions that the settlor has provided.

The Beneficiaries

These are the people (or organisations) who will benefit from the trust. Often, these are children, grandchildren, or even a favourite charity.

One of the biggest reasons why trust funds are so popular is because you can control how and when the beneficiaries receive their share. For instance, you might set it up so your children get access to the funds when they turn 25 or when they buy their first home.

What’s the difference between a will and a trust fund?

A will and a trust fund are both tools for managing and distributing your assets, but they work in different ways and serve slightly different purposes. A will is a legal document that outlines how your assets should be distributed after your death. It only takes effect once you’ve passed away, and typically requires probate—a legal process to validate the will and administer your estate.

Alternatively, a trust fund can take effect during your lifetime or after your death, depending on the type you set up. Trusts offer more flexibility and control over how your assets are managed and distributed, often bypassing probate entirely. While a will in family law provides instructions, a trust actively manages assets, offering ongoing protection and potentially saving time, money, and stress for your loved ones.

Types of trusts

There are various types of trusts, and the best one for you will depend on your personal circumstances. Here are a few common options:

• Discretionary Trusts: The trustees decide how and when the beneficiaries receive their inheritance, giving flexibility to adapt to changing circumstances.
• Bare Trusts: The assets are held for a specific beneficiary, who has an absolute right to them.
• Life Interest Trusts: These let someone benefit from the trust during their lifetime, with the remaining assets passing to other beneficiaries later.
• Charitable Trusts: Ideal if you want to support a cause that means a great deal to you.

At Labrums, we can support you to find out which trust is right for you and guide you through the process from start to finish.

When should you consider setting up a trust?

A trust fund is an excellent option for safeguarding your assets and ensuring they are managed in a way that benefits your loved ones. It can provide financial security for young children or vulnerable family members, keep your wealth within the family by mitigating risks like divorce or remarriage, and allow you to support beneficiaries without giving them immediate control over large sums.

Additionally, trusts are a valuable tool for minimising the burden of inheritance tax, helping to preserve more of your hard-earned assets for future generations.

Contact us to find out more

Whether you’re looking to protect your children’s inheritance, mitigate tax burden, or simply get peace of mind about the future, a trust fund could be the best choice. At Labrums Solicitors, we’ve been helping clients with their wills and trusts for decades, and we’d love to help you too. Find out more by contacting us today.