What Is A Trust Fund?

Establishing a trust fund is one of the most effective ways to manage, protect, and pass on wealth. Whether you’re planning for your children’s future, safeguarding family assets, or creating long-term financial security for a loved one, a well-structured trust can offer clarity, control, and peace of mind.

At DLS Law, our experienced solicitors in London and Milton Keynes regularly assist clients with the creation and management of trust funds, ensuring each trust is tailored to meet individual circumstances and long-term objectives. But what is a trust fund? In this guide, we’ll explain what a trust fund is, how it works, and how to establish one correctly — helping you make informed decisions about your financial future.

What Is A Trust Fund? Your Questions Answered

Planning for the future often involves more than simply saving or writing a will. For many individuals and families, creating a trust fund is a secure way to protect assets, manage wealth, and provide long-term financial stability for loved ones. A trust fund is a legal arrangement that allows assets such as money, property, or investments to be held and managed on behalf of others — often with significant tax and inheritance benefits.

In this article, our team at DLS Law explains everything you need to know, including:

• Trust Fund Meaning
• How Does A Trust Fund Work?
• Types Of Trust Funds
• How Do I Set Up A Trust Fund?
• Do You Pay Tax On A Trust Fund?
• How To Claim A Trust Fund

Trust Fund Meaning

A trust fund (often referred to simply as a “trust”) is a legal arrangement that allows assets — such as money, property, or investments — to be held and managed by one party on behalf of another. It’s a cornerstone of modern estate planning, offering both flexibility and protection.

A typical trust involves three key parties:

• Settlor (or grantor): The person who creates the trust and transfers their assets into it.
• Trustee: The individual or organisation responsible for managing those assets in accordance with the trust deed.
• Beneficiary: The person, group, or organisation that benefits from the trust.

Trust funds can contain almost any type of asset — from cash, real estate, and shares, to family businesses or valuable personal items. Depending on their structure, trusts can offer tax advantages, safeguard assets from potential claims, and ensure funds are distributed exactly as intended, either during the settlor’s lifetime or after their death.

How Does A Trust Fund Work?

A trust fund functions by transferring assets from the settlor to the trustee, who manages them for the beneficiary’s benefit. This is formalised through a trust deed — a legal document outlining the rules of the trust, how the assets should be handled, and under what conditions they can be distributed.

Key Roles in a Trust

• Settlor: The person who establishes the trust and defines its terms.
• Trustee: The party responsible for managing and protecting the trust’s assets. Trustees must always act in the best interests of the beneficiaries, adhering to strict fiduciary duties.
• Beneficiary: The individual(s) or organisation(s) entitled to benefit from the trust.

How the Process Works

• The settlor decides to create a trust and identifies which assets will be transferred into it.
• A trust deed is drafted — this acts as the legal framework for how the trust operates.
• Assets are legally transferred to the trustees, who take ownership for management purposes but cannot use them for personal gain.
• The trustees manage the trust in accordance with the deed, distributing income or assets to beneficiaries at specific times or upon certain events (such as reaching a particular age).

Trusts Are Particularly Valuable When You Want To:

• Provide ongoing financial support to children or vulnerable family members.
• Manage wealth in a tax-efficient way.
• Protect assets from claims, creditors, or divorce settlements.
• Support charitable or educational causes.

For a detailed explanation of how trustees must manage income, you can refer to GOV.UK Trusts and Taxes page.

Types Of Trust Funds

There are many different types of trust funds, each designed to meet specific objectives. Choosing the right type will depend on your financial goals, the nature of your assets, and how much control you wish to retain.

By Flexibility: Revocable and Irrevocable Trusts

• Revocable (Living) Trusts:
  Created during the settlor’s lifetime and can be altered or dissolved at any time. While the settlor retains control, the assets remain part of their estate for tax purposes. These trusts offer convenience and flexibility for those who may wish to adjust their arrangements later in life.
• Irrevocable Trusts: Once created, these cannot usually be changed. The assets are removed from the settlor’s estate, offering potential inheritance tax benefits and asset protection. Irrevocable trusts are often used for wealth preservation and tax planning.

By Creation Time: Living vs. Testamentary Trusts

• Living Trusts: Established while the settlor is alive. These can provide income or capital distributions during the settlor’s lifetime and continue after their death.
• Testamentary Trusts: Created through a will and activated upon the settlor’s death. These are commonly used to provide for minor children or to distribute assets gradually.

Specific Types of Trusts

• Bare Trusts: Simple arrangements where beneficiaries have an immediate and absolute right to the trust’s capital and income. Often used for children until they reach 18.
• Discretionary Trusts: Give trustees the flexibility to decide how and when beneficiaries receive funds. Suitable for families with changing circumstances or to protect vulnerable beneficiaries.
• Interest in Possession Trusts: Provide beneficiaries with the right to receive income from the trust, while the capital remains preserved for future beneficiaries.
• Charitable Trusts: Created for charitable purposes, these trusts can receive special tax exemptions.
• Disabled or Vulnerable Person Trusts: Designed to support individuals with disabilities, offering protection while maintaining eligibility for certain state benefits.

More on the tax treatment of these trusts can be found via MoneyHelper.

How Do I Set Up A Trust Fund?

Establishing a trust requires careful planning and expert legal advice. The process involves deciding the purpose of the trust, selecting trustees and beneficiaries, and drafting a legally binding trust deed.

1. Plan Your Trust

• Define your objectives: Identify why you are creating the trust — common reasons include inheritance planning, asset protection, or providing financial support for future generations.
• Choose the type of trust: Review the different trust types to determine which best fits your goals.
• Identify assets: List the property, investments, and financial accounts to be transferred.
• Appoint trustees: Choose trustworthy and capable individuals or professional trustees (such as a solicitor or trust company). Having at least two trustees is recommended.
• Designate beneficiaries: Clearly specify who will benefit and how — whether through periodic income or lump sums.

2. Create the Trust Deed

• Engage a solicitor: Working with experienced solicitors in London and Milton Keynes, ensures your trust deed is properly drafted and compliant with UK law.
• Define the terms: The deed should clearly state the powers of trustees, rules for distribution, and any conditions that must be met.
• Sign and formalise: The deed must be signed and may be witnessed or notarised for legal recognition.

3. Fund the Trust

• Transfer assets: Change legal ownership of the chosen assets to the trust. This might include re-registering property titles or transferring shares.
• Be thorough: Maintain a detailed list of assets transferred into the trust.
• Consider tax implications: Transferring assets may trigger Inheritance Tax or Capital Gains Tax, depending on the circumstances. Professional advice can help minimise these costs.

Setting up a trust can be complex, especially for larger estates or families with cross-border assets. Our team at DLS Law provides tailored guidance, ensuring your trust is legally sound and aligns with your broader estate and tax planning strategy.

Do You Pay Tax On A Trust Fund?

Trust taxation can vary significantly depending on the type of trust. In the UK, trusts are generally subject to Income Tax, Capital Gains Tax, and potentially Inheritance Tax.

General Tax Rules

Most trusts do not pay income tax on income up to £500. Beyond this threshold, trustees must pay tax on all income received. Trustees are also responsible for ensuring tax returns are filed correctly through HMRC’s Trust and Estate Tax Return system.

The main tax rates (as of 2025) are:

• Dividend income: 39.35% for discretionary trusts.
• All other income: 45%.

(See GOV.UK Trusts and taxes page)

Taxation by Trust Type

• Accumulation or Discretionary Trusts: Trustees pay tax on income and may divide the £500 tax-free allowance if multiple trusts exist.
• Interest in Possession Trusts: Trustees pay tax at 8.75% on dividends and 20% on other income. If income is paid directly to the beneficiary (“mandated”), the beneficiary reports it via Self Assessment.
• Bare Trusts: Beneficiaries are personally responsible for reporting and paying tax on income earned from trust assets.
• Settlor-Interested Trusts: The settlor pays income tax on the trust’s income, even if they don’t receive it directly. Trustees must report income to HMRC and provide statements to the settlor.

Because of the complexity of trust taxation, working with qualified professionals ensures compliance and avoids unnecessary tax liability. DLS Law’s private solicitors can help you navigate these obligations with ease.

How To Claim A Trust Fund

If you are the beneficiary of a trust fund — particularly a Child Trust Fund (CTF) — you may need to actively claim it once eligible.

If You Know the Provider

If you already know which bank or financial institution manages the trust:

• Contact the provider directly to initiate your claim.
• Provide identification and any supporting documents.

If You Don’t Know the Provider

If you’re unsure which provider holds your Child Trust Fund:

• Visit the GOV.UK – find a child trust fund service
• 1. Sign in using your GOV.UK One Login.
• 2. Enter your National Insurance number and date of birth.
• 3. HMRC will send your provider’s details within approximately three weeks.
• 4. Contact the provider to access your funds.

Important Considerations

• Avoid claims firms: The reclaim process is free via GOV.UK — there’s no need to pay a company to assist you.
• Keep records handy: You’ll need your National Insurance number and proof of identity.
• For other types of trusts: If your trust is managed by appointed trustees, you’ll need to liaise directly with them to understand the claiming procedure.



Protecting Your Future with DLS Law

A trust fund can be an invaluable tool for protecting wealth, supporting loved ones, and planning for the future — but it must be set up and managed correctly to achieve its full potential. From choosing the right structure to understanding tax implications, professional guidance ensures your trust works as intended.

At DLS Law, our experienced solicitors in London and Milton Keynes specialise in estate planning, trust formation, and wealth management. We take time to understand your goals and design bespoke solutions that safeguard your assets and provide lasting security for your family.

Whether you’re setting up your first trust or reviewing an existing arrangement, our team is here to help.

Contact DLS Law today to speak with one of our expert solicitors and take the next step in protecting your financial legacy.