Setting Up a Family Trust: A Complete Guide for HNW Individuals

The family trust has been a cornerstone of wealth planning for high-net-worth individuals for centuries. Used well, a trust can protect assets from creditors, manage succession across generations, reduce inheritance tax exposure, and provide for vulnerable family members in a controlled way. Used poorly — or set up without adequate professional advice — a trust can generate costly tax charges, regulatory headaches, and family conflict.

This guide sets out the key considerations for any internationally mobile HNW individual thinking about whether a family trust is right for them.

What Is a Trust, and Why Use One?

A trust is a legal arrangement under which one party (the settlor) transfers assets to another (the trustee) to hold for the benefit of specified individuals or a class of people (the beneficiaries). The trustee holds legal title to the assets, but has a fiduciary duty to manage them in the beneficiaries' interests according to the terms of the trust deed.

Trusts are useful for several reasons:

• Succession planning: assets held in trust pass outside your estate on death and are not subject to probate, which can be slow and expensive — particularly for internationally held assets
• Inheritance tax planning: properly structured trusts can remove assets from your estate, potentially reducing IHT liability, subject to relevant charges and conditions
• Asset protection: in many jurisdictions, assets in a trust are harder for creditors to access than personally held assets
• Control: a trust can specify precisely how and when beneficiaries receive assets — important where children are young, financially inexperienced, or where the settlor has concerns about a beneficiary's relationship or circumstances
• Privacy: trust assets are not publicly disclosed in the way that probate estates often are

Discretionary vs Bare Trusts

The two most common types in UK-connected planning are discretionary trusts and bare trusts.

Discretionary trusts give trustees the power to decide, within the terms of the trust deed, how income and capital are distributed among a class of beneficiaries. This flexibility is valuable but comes with tax complexity: discretionary trusts are subject to the inheritance tax periodic charge (every 10 years at up to 6 per cent of the trust value above the nil-rate band) and an exit charge when assets leave the trust.

Bare trusts are simpler: each beneficiary has an absolute, vested right to their share. They are commonly used to hold assets for children until they reach adulthood. Income and gains in a bare trust are treated as belonging to the beneficiary for tax purposes — which can be tax-efficient if the beneficiary has a low income. However, bare trusts provide little asset protection or control flexibility.

Other structures worth knowing include interest in possession trusts (the beneficiary has a right to income, not capital) and accumulation trusts (income is retained within the trust rather than distributed). Each has a distinct tax treatment.

Settlor Powers and Letter of Wishes

A common concern is that once assets are placed in a discretionary trust, the settlor loses control. In practice, while the trustees hold legal title, the settlor can retain influence through:

• Letter of wishes: a non-binding document addressed to trustees expressing the settlor's intentions for distributions. Trustees are not legally required to follow it but typically give it significant weight
• Power of revocation: in some offshore trust structures, the settlor may retain a power to revoke the trust and recover the assets — though this has significant tax implications in the UK (a revocable trust may be treated as transparent for UK tax purposes)
• Reserved powers: in some jurisdictions, the trust deed can grant the settlor reserved powers over investment decisions or trustee appointment without the trust being treated as a sham

UK-resident settlors should be aware that certain reserved powers will cause the trust to be taxed as if the assets remained in their estate for income tax and/or capital gains tax purposes (the "settlor-interested trust" rules). This does not necessarily prevent the trust from being useful for IHT purposes, but complicates the picture.

Trustee Selection

The choice of trustee is critically important. Trustees carry legal responsibility for managing trust assets, filing trust tax returns, keeping records, and making distributions. Poor trustee selection is one of the most common causes of trust failure.

Options include:

• Individual trustees: family members or trusted advisers. Low cost but carries personal liability and continuity risk (what happens when the individual dies or loses capacity?)
• Professional trust companies: specialist firms offering fiduciary services, typically licensed in the trust's governing jurisdiction. More expensive but provide continuity, expertise, and regulated governance
• Combination: a professional trust company alongside one or two individual trustees ensures both professional governance and family connection

The Protector Role

Many modern trust deeds include a protector — typically an individual with power to remove and appoint trustees, veto certain trustee decisions, or require trustees to seek the protector's consent before making major distributions. The protector role bridges the gap between the settlor's loss of legal control and the need for oversight.

The protector is typically a trusted individual — a family friend, a professional adviser, or a family member who is not a beneficiary. The key requirement is independence from both the settlor and the trustees to ensure the role is substantive rather than nominal.

Governing Jurisdiction: Jersey, Cayman, or UK?

For internationally mobile HNW individuals, the choice of governing jurisdiction matters.

UK-resident trusts are simpler to administer and familiar to HMRC. They are subject to UK trust taxation (including the periodic and exit charges noted above). They may be appropriate where all beneficiaries are UK-based and the trust assets are predominantly UK.

Jersey trusts are widely used by HNW families with international connections. Jersey has a sophisticated, well-developed trust law, a professional trust industry, and is not subject to EU succession regulation. Jersey does not impose tax on trust income or gains in the hands of non-Jersey-resident beneficiaries. For UK beneficiaries, UK tax rules apply to distributions they receive.

Cayman Islands trusts are common for very large structures, particularly where US beneficiaries are involved. The Cayman trust industry is sophisticated, and Cayman law includes STAR trust provisions (Special Trusts Alternative Regime) that offer particular flexibility for commercial trusts or where beneficiaries are not yet identified.

Channel Islands vs Caribbean: Jersey and Guernsey offer greater proximity to UK advisers and regulators; Cayman and British Virgin Islands suit structures with US nexus or larger, more complex portfolios.

The choice of jurisdiction should be driven by the family's specific circumstances, residency, and long-term intentions — not by perceived secrecy (the era of genuine secrecy in offshore structures is over).

HMRC Reporting Requirements

UK-connected trusts face significant reporting obligations:

• Trust Registration Service (TRS): most UK trusts and many non-UK trusts with UK assets or UK-resident trustees must register with HMRC's TRS. Information registered is not fully public but is accessible to certain authorities and professional bodies
• Annual trust tax return (SA900): required where the trust has income or gains to report
• Inheritance tax returns: on creation (where assets above the nil-rate band are settled), on every tenth anniversary, and on every exit charge event
• Reporting Fund status: if the trust holds offshore funds, reporting fund elections and income attribution may be required
• CRS/FATCA: trusts with financial assets may be financial institutions for CRS purposes, requiring annual reporting to tax authorities

The administrative burden of trust compliance is real and should be factored into the cost-benefit analysis before establishment.

Costs and Suitability

Professional trust establishment costs typically range from £5,000 to £30,000 depending on complexity and jurisdiction. Annual ongoing fees for a professional trustee service range from £2,000 to £15,000 or more for larger or more complex structures. Legal and tax advice on establishment adds further cost.

For smaller estates, a trust may not be cost-effective. Broadly, trusts become compelling where the assets to be settled are material (commonly above £500,000 to £1 million), where there are genuine planning objectives that cannot be achieved more simply, and where the family has the sophistication to engage properly with trustees over the long term.

Tax rules change and the benefits available today may not persist. Investments and assets held in trust can fall as well as rise in value. Professional legal and tax advice is essential before establishing any trust structure.

How Global Investments Can Help

Global Investments advises internationally mobile HNW individuals on the practical use of trust structures within a broader estate and wealth planning strategy. We do not act as trustees ourselves, but we work closely with leading professional trust providers in Jersey and other jurisdictions and can help you assess whether a trust structure is appropriate for your circumstances, identify the most suitable jurisdiction and trustee, and coordinate the legal, tax, and investment aspects of establishment.

Trusts are long-term structures: the family that establishes one today should expect it to operate for 20 years or more. Getting the initial structuring right is essential. Contact us to discuss your situation in confidence.