Should You Set Up a Trust for Your Children? What Every Parent Needs to Know

When planning for the future, many parents consider creating a trust to protect their children’s inheritance. Trusts can offer structure, protection, and potential tax advantages. But despite their benefits in the right situations, trusts are not a one-size-fits-all solution. In fact, they can create unintended complications when used unnecessarily.

At Arlingsworth Solicitors, our private client team regularly advises families on the pros and cons of trust planning. Here’s what you need to know before you include a trust in your will or estate plan.

Understanding What a Trust Actually Does

A trust is a legal arrangement that allows assets to be held and managed by trustees on behalf of beneficiaries. In the context of inheritance, a trust allows you to control how and when your children receive what you leave behind.

For example, you can:

  • Delay access to large sums until your children reach a certain age (such as 21 or 25)
  • Restrict the use of funds for specific purposes like education or home ownership
  • Appoint trusted individuals to manage those assets responsibly

In some situations, this level of control is both wise and necessary. In others, it may result in avoidable tax costs and administrative complexity.

When a Trust is Worthwhile

Setting up a trust can be an important step in the following situations:

  • You have a child with a disability or long-term vulnerability.
    In this case, a vulnerable beneficiary trust (VBT) can ensure the person is supported financially without affecting their eligibility for means-tested benefits. VBTs also benefit from a more favourable tax regime than standard discretionary trusts.
  • You have high-value assets and want to prevent early access.
     If your children are likely to inherit substantial wealth, you may wish to delay when they receive it. A trust can help stagger distributions or make access conditional.
  • You want to protect family wealth from divorce or bankruptcy.
     Trusts can provide a layer of protection against future claims on your children’s estate from ex-partners or creditors.

You have complex family dynamics.
 In blended families or second marriages, a trust can help ensure assets are passed according to your wishes without disputes between different sets of beneficiaries.

When a Trust May Not Be Necessary

Trusts are sometimes created with good intentions but poor advice. In many cases, they end up doing more harm than good, particularly when:

  • The estate is modest and does not require asset control mechanisms
  • The trust duplicates protections already provided by law (e.g. automatic holding of funds for under-18s)
  • The tax burden and administrative workload outweigh any planning benefit

Parents are often advised to set up trusts to “save on inheritance tax,” but the reality is more complex. Most standard discretionary trusts face:

  • Annual income and capital gains tax obligations
  • Potential 10-year charges on trust assets over the IHT threshold (£325,000)
  • Exit charges of up to 6% when assets are distributed

Trusts also create ongoing responsibilities for trustees, who may be family members without legal or financial training.

Avoiding Common Mistakes

Our team frequently supports clients in unwinding or restructuring trusts that were poorly advised or not properly thought through. Here are a few key pitfalls to avoid:

  • Creating a trust without clear goals
     If you’re not sure why the trust is needed, it may not be the right tool.
  • Failing to appoint the right trustees
     Trustees should be chosen with care. They must be responsible, financially literate, and willing to act in the best interests of the beneficiaries.
  • Not reviewing the trust regularly
     Laws and family circumstances change. A trust created five years ago may no longer be suitable. We recommend reviewing your trust annually.

Assuming tax savings without doing the calculations
 While some trusts can reduce your estate’s IHT exposure (particularly when combined with lifetime gifting), others may increase it. Getting personalised advice is key.

What About Life Insurance and Pensions?

Assets like life insurance or death-in-service benefits can be directed into a trust, keeping them outside of your estate for IHT purposes. However, this requires proper structuring and nomination forms. If done incorrectly, these funds could be taxed unnecessarily or delay distribution to your intended beneficiaries.

Final Thoughts: Should You Set Up a Trust?

There’s no universal answer. For some families, a trust provides peace of mind, tax efficiency, and structure. For others, it adds cost and complexity with no real benefit.

At Arlingsworth, we take a tailored approach. Our private client solicitors will review your family circumstances, financial position, and estate goals to determine whether a trust is appropriate, and if so, how it should be structured to protect your children’s future.