When a Trust Isn't What You Think It Is

Trusts have a reputation for being complicated, expensive, and only for the wealthy. But here's something that might surprise you: you could be dealing with a trust right now without even realising it - and it might be much simpler than anyone's told you.

Here's What Often Happens

When someone passes away and leaves money to their children or other beneficiaries, that money often sits in what's technically a trust. The will creates this arrangement automatically. The surviving parent or appointed person becomes the trustee, holding the money until the beneficiaries reach a certain age.

Similarly, when funds are raised for someone who's been injured - perhaps through a community fundraising effort after an accident - those funds typically go into a trust structure.

The bank or building society asks for documentation. Forms get filled in. And somewhere along the way, someone mentions the words "discretionary trust" and suddenly everyone assumes this is a complex arrangement with special tax rules and hefty tax bills.

But Here's What People Don't Realise

Not all trusts are created equal. Just because money is being held in trust doesn't mean it's a discretionary trust with all the complexity that implies.

When a parent passes away and leaves money to their children, this often creates what's called a "bereaved young person's trust" or an "18-25 trust". These work very differently from discretionary trusts. The young people are entitled to the money at a certain age, and the tax treatment is usually much more straightforward - often using the beneficiary's own tax allowances rather than trust tax rates.

When someone is injured and money is raised for them, if they're the only beneficiary, there might be special provisions available that significantly reduce the tax burden. These vulnerable person elections exist specifically to protect people who need financial help, but they're often missed simply because nobody realises they're an option.

Why Does This Matter?

The difference between trust types isn't just paperwork - it's real money. A discretionary trust might face tax rates of 45% on income. But if the same money is correctly identified as a different type of trust, the beneficiaries might pay little or no tax using their personal allowances.

More importantly, it affects how the money can be used. Some trusts give beneficiaries automatic rights to the money at certain ages. Others allow trustees to use funds for education or maintenance whilst protecting the capital. Understanding which type you're dealing with changes everything.

The Simple Test

Ask yourself these questions:

• Did this trust come about because someone died?

• Are the beneficiaries specifically named (rather than a broad class like "my descendants")?

• Is there a specific age when beneficiaries become entitled to the money?

• Is there a single beneficiary who might be considered vulnerable?

If you're answering yes to these questions, you might not have the complex discretionary trust that everyone assumes.

Getting It Right Matters

This isn't about pointing fingers or saying anyone's done something wrong. The world of trusts is genuinely confusing, and different professionals see different pieces of the puzzle. Banks see account opening requirements. Accountants see tax returns. Solicitors see legal structures.

But for the families dealing with these situations - often whilst grieving or managing difficult circumstances - understanding what they actually have can make an enormous difference. It might mean more money available for a child's education. It might mean simpler administration. It might mean peace of mind knowing everything's being handled correctly.

The Bottom Line

If you're dealing with a trust that came about through bereavement, injury, or other life-changing circumstances, and something doesn't feel quite right about how it's being handled - whether that's the tax treatment, the complexity, or the restrictions being placed on the money - it's worth getting a second opinion.

These situations are more common than you might think. Every week I speak to families who've been told they have one type of trust when actually they have something quite different. Sometimes a fresh pair of eyes can spot opportunities that make a real difference.

The Financial Conduct Authority does not regulate trusts. This article is for educational purposes only. Always seek professional advice for your specific situation.

If you're dealing with a trust situation and would like to understand your options better, feel free to get in touch. Sometimes a conversation can clear up confusion that's been building for months or years.