Smart Estate Planning: Using Trusts to Protect Your Wealth and Legacy
· Posted on: June 2nd 2025 · read
Insight written by Frank Chatfield, Technical Support Manager
Key reforms to Inheritance Tax announced in the Autumn Budget in October have highlighted the need for careful estate planning.
The reforms have also sparked significant discussion on how Inheritance Tax (IHT) will affect individuals and businesses.
Key changes include bringing unused and inherited pensions into the scope of IHT, which will impact retirement savings and beneficiary provisions. Additionally, Business Relief, crucial for passing on family businesses without IHT, faces challenges with the removal of relief on AIM shares, raising concerns for investors and business owners regarding their estate strategies.
Trusts could be a viable option to help you take control of your estate planning, mitigate the impact of IHT, and thereby protect your wealth and legacy - read on to discover the benefits of Trusts, how they work, and the different types available.
Firstly, what is a Trust?
A trust is a legal structure that enables the owner of an asset (such as money, investments, land, or property) to transfer legal ownership of the asset to designated individuals, providing them with guidelines on how to manage that asset for the benefit of specified other individuals.
The role of Trusts in estate planning
Trusts continue to be a beneficial option for effective asset management and tax efficiency in estate planning. They play a crucial role in estate planning, providing not only the capability to manage the distribution of assets but also offering considerable advantages in reducing inheritance tax obligations.
Whether employed to diminish the estate's value or to guarantee that assets are transferred in a tax-efficient way, trusts deliver both flexibility and safeguarding for the settlor and beneficiaries.
How do Trusts work?
Trusts play a pivotal role in estate planning by:
- Managing assets
- A trust enables the settlor to retain authority over who will benefit from the trust assets, the timing of those benefits, and the degree to which they will be granted. Trusts are particularly beneficial when the beneficiary is either too young or unable to take legal ownership of the assets or manage their own affairs.
- Avoiding probate
- Trust assets can be distributed from the trust upon the settlor's death without the usual delays associated with the probate process. The funds can subsequently be utilised to settle the Inheritance Tax bill and probate costs.
- Asset Protection
- By putting assets into a trust, they are instantly shielded from claims by third-party creditors, as well as from the effects of care fees, for instance.
Reducing your IHT obligations
A key advantage of incorporating trusts into estate planning is the ability to lessen inheritance tax obligations. In the UK, inheritance tax is levied at a rate of 40% on estates exceeding £325,000 (the nil rate band). Nonetheless, there are various strategies that can assist in alleviating this financial strain when utilising trusts:
- Gifting Assets into Trust Transferring assets into a trust allows individuals to exclude those assets from their estate subject to IHT. The value of these assets is not factored into the estate when determining the IHT liability, which may lead to a decrease in the tax obligation on the estate. It is essential that the transfer is a genuine gift and that the settlor does not retain control over the assets.
- Use of Lifetime Gifts By transferring assets into a trust while still alive, the settlor can diminish the overall value of their estate and utilise the yearly exemptions for gifts. The assets will not be included in the estate if the settlor lives for seven years following the gift.
- Trusts and the Nil-Rate Band Specific kinds of trusts, like the discretionary trust, can be organised to utilise multiple nil-rate bands. A married couple can establish a discretionary trust to benefit from each other's nil-rate bands.
- The Residence Nil-Rate Band (RNRB) The RNRB offers an additional IHT allowance when passing your home to direct descendants. A trust can help beneficiaries access the RNRB.
Types of Trust
There are several types of trusts that can be employed for estate planning and IHT mitigation.
The common types of these are as follows:
The trustee possesses the authority to determine the distribution of assets to beneficiaries. This can be advantageous in estate planning, particularly when the settlor wishes to maintain control over asset distribution while simultaneously decreasing the estate's value for inheritance tax purposes.
The beneficiary possesses an immediate and unequivocal entitlement to the trust assets. This is frequently employed for minors or individuals who are unable to handle their own affairs.
The settlor contributes funds to the trust, initiating a seven-year period regarding the gift, while still maintaining the ability to receive flexible periodic payments. Flexible Reversionary Trusts enable the settlor to determine that a portion of the initial investment may be returned to them annually on the anniversary of the Trust's creation.
A loan trust enables a settlor to retain access to their funds while relinquishing any growth derived from them. Upon establishing a loan trust, the settlor provides a loan to the trustees, who then invest the money. The settlor has the right to request repayment of the entire loan or a portion of it at any time. Consequently, the borrowed funds remain part of the settlor's estate for Inheritance Tax considerations. However, any growth generated will be immediately excluded from their estate and placed in trust for the beneficiaries.
A discounted gift trust allows the settlor to deposit funds into the trust and subsequently make a series of fixed withdrawals throughout their lifetime. The initial sum transferred into the trust is treated as discounted for Inheritance Tax purposes, resulting in an immediate decrease in the settlor's Inheritance Tax obligation. Any growth from the investment is instantly excluded from the settlor's estate, and after a period of seven years, the original investment amount also becomes exempt from their estate.
Take action now
An effective estate plan is key to preserving the wealth you’ve built and ensuring it is transferred according to your wishes. Trusts offer a sophisticated way to maintain control, protect assets, and significantly reduce inheritance tax exposure.
Whether you're thinking about how to pass on wealth, protect loved ones, or safeguard your business, starting the conversation early can make all the difference. With the right structures in place, like trusts, you can take confident steps toward securing your legacy and protecting what matters most.
MHA Wealth can help
If you haven’t reviewed your estate strategy recently, now is a good time to consider whether your plans still reflect your goals. A conversation with your financial advisor can help provide clarity on your options and ensure that your estate is structured in the most effective way.
If you're unsure where to begin, please speak to your usual advisor or contact a member of the MHA Wealth team, and we’ll be happy to assist you.
Important Information
MHA Wealth is the trading name of MHA Wealth Ltd, a company registered in England (1916615) with registered office at The Pinnacle, 150 Midsummer Boulevard, Milton Keynes, MK9 1LZ.
MHA Wealth is authorised and regulated by the Financial Conduct Authority (FCA) with registered number 143715 and is a member of the London Stock Exchange.
This communication is for general information only, is a marketing communication, and is not intended to be individual investment advice, a recommendation, tax, or legal advice. The views expressed in this article are those of MHA Wealth or its staff and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. In particular, the information provided will not address your personal circumstances, objectives, and attitude towards risk.
Tax and Estate Planning Services (including Trusts) are not regulated by the Financial Conduct Authority.
This information represents our understanding at the time of publication of current law and HM Revenue & Customs practice. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. You are therefore recommended to seek professional regulated advice before taking any action. MHA Wealth is a member of the MHA group. Further information on the MHA group can be found at https://www.mha.co.uk/about-mha-group
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