Setting Up a Living Trust: Step by Step Guide

What is a lifetime trust?

A lifetime trust is a legal arrangement you set up while you are alive to hold assets for the benefit of others. The Latin term is inter vivos trust, distinguishing it from trusts created through a will after death.

When you create a lifetime trust, you transfer ownership of certain assets into the trust. A trustee then manages those assets according to your instructions, either for your benefit during your lifetime or for named beneficiaries.

In the UK, lifetime trusts serve different purposes than in jurisdictions like the United States. While avoiding probate is often cited as a benefit, UK probate is generally less costly and complex than its American equivalent. The more common reasons for establishing a lifetime trust in the UK relate to asset protection, privacy, and providing for beneficiaries who cannot manage money themselves.

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Reasons for setting up a lifetime trust

There are several practical reasons to consider this type of arrangement.

• Providing for someone who cannot manage money themselves, such as a young adult or a person with a disability.
• Keeping certain assets private. Unlike a will, trust documents do not become public record after death.
• Managing tax liabilities in some circumstances, though professional advice is essential given the complexity involved.

For managing finances if you lose mental capacity, a Lasting Power of Attorney is typically the more straightforward option in the UK. This allows a named attorney to handle your affairs without court involvement. Lifetime trusts can serve a similar function but involve greater setup costs and ongoing administration.

It is important to understand the specific capabilities and limitations of a lifetime trust. Transferring assets into a trust can trigger immediate tax charges. For transfers exceeding the nil rate band, a 20% lifetime charge may apply. Whether a trust reduces or increases your overall tax exposure depends on the type of trust, the value of assets, and your individual circumstances. GOV.UK provides current information on trust taxation and reporting requirements.

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Steps to set up a lifetime trust

Start by deciding what you want the trust to achieve. Be clear about which assets you want to include, who should benefit, and when distributions should happen. This will shape the terms of the trust deed.

Choose your trustees carefully. You can act as a trustee yourself, but you will usually need at least one other person or a professional trustee. Trustees have legal duties and can be held personally liable for mistakes, so the role carries significant responsibility.

The trust deed is the legal document that sets out how the trust works. It names the trustees and beneficiaries, describes the trust property, and explains the rules for managing and distributing assets. Engaging a solicitor is commonly advised to ensure the trust deed aligns with legal obligations and reflects your wishes accurately.

Once the deed is signed, you transfer assets into the trust. For property, this means changing the registered ownership at HM Land Registry. For investments or bank accounts, you notify the relevant institutions. The trust only controls assets that have been properly transferred into it.

Getting professional advice

Lifetime trusts come with ongoing responsibilities. Since January 2022, most UK trusts must be registered with HMRC's Trust Registration Service, regardless of whether they have a tax liability. Trustees may also need to file tax returns and keep detailed accounts.

A solicitor or tax adviser can help you understand whether a lifetime trust suits your situation. The Society of Trust and Estate Practitioners maintains a directory of specialists in this area. For general guidance on trusts and taxes, check the GOV.UK website for current information.

The Next Step

Now that you have read through the advice above, you might want to put it into practice. Our Estate Planning Checklist lets you tell us about your circumstances and get a personalised estate planning checklist covering wills, trusts, and inheritance tax. Try it now →