Will Trust or Lifetime Trust: Which One and When It Applies

A will trust and a lifetime trust are two different ways of putting money or property into a legal arrangement, and the main difference is timing. A will trust only comes into effect when you die¹. A lifetime trust usually comes into effect as soon as it is set up, while you are still alive¹. That single difference drives almost everything else: how the trust is taxed, what it costs to arrange, what it can protect, and who it tends to suit.

The tax treatment is where the two diverge most sharply. Assets placed into a will trust are generally still considered part of your estate for inheritance tax purposes¹. Assets placed into a lifetime trust are not considered part of your estate, so trustees can manage and distribute them without a grant of probate or confirmation, but if you die within seven years of placing assets in trust they may be subject to inheritance tax¹. Some lifetime trusts also face an immediate 20% charge on any balance over £325,000, including gifts made in the previous seven years, and a further charge every 10 years worth up to 6% of the value over £325,000².

Neither route is a way around care home fees. It is generally not possible to use a lifetime trust to exempt your home from the local authority's calculations of your assets when assessing your care home costs, and transferring property into one carries a significant risk of being treated as deliberate deprivation of assets².

A will trust takes effect only after death

A will trust is created within your will to allow you to protect property or assets you hope to pass on to your family². It activates upon your death, and you set up the conditions in advance². Trustees can only use the trust for money or property in the trust, and only after the person has died⁵. A will is only effective on your death and has no legal authority before that point, which is why a power of attorney, not a will, is the document that lets someone act for you during your lifetime⁶.

Will trusts are mainly used by couples to deal with a family home if they own it as tenants in common². They are also used where someone wants to leave money or property to a family member who cannot manage it themselves, for example because they are permanently disabled or too young³. A trust for a disabled person usually lasts for the lifetime of that person, but it can be shorter or longer⁵.

One practical point is registration. A will trust created by a person's will and coming into effect on their death can remain unregistered for up to two years; if it still exists once those two years are up, it must be registered with the Trust Registration Service⁷. If assets are distributed from the trust within two years of your death, they are treated as if they were made by you in your will, and relevant exemptions and allowances may apply¹.

A will trust cannot hold everything. Putting a trust in your will means it takes effect only after your death, which would not work for some types of assets such as pensions, death in service benefits and life cover³. Those need a separate trust set up during your lifetime.

Lifetime trusts: giving assets away while alive

A lifetime trust is a type of trust you can create while you are still alive³. It usually comes into effect as soon as it is set up¹. It can be a discretionary trust or a disabled person's trust, and it gives the flexibility of other people paying in³. For inheritance tax purposes, placing assets into a trust is treated in the same way as making a gift: the assets could be subject to inheritance tax if you die within seven years, but fall out of your estate if you live longer³.

With a lifetime trust, your home can be gifted to the trust while you carry on living in it². Because the assets are not considered part of your estate, trustees can manage and distribute them without a grant of probate or confirmation¹. That can mean money reaches people sooner than it would through a will.

The trade-offs are real. Transferring property into a lifetime trust carries a significant risk of being considered deliberate deprivation of assets, meaning you are unlikely to qualify for financial support from your local authority³. A local authority may regard the arrangement as deliberate deprivation of assets, and if so it can assess you as if you still owned the property and refuse to fund your care². There is also no guarantee that money held in a discretionary trust will always be treated the same way in the future, because laws change⁸.

Lifetime trusts are most useful for someone who wishes to put money aside for the future for a family member who cannot manage money for themselves, for example because they are permanently disabled or are too young³.

Inheritance tax: how each trust is treated

The two trusts sit in different places for inheritance tax. Assets placed into a will trust are generally still considered part of your estate for inheritance tax purposes¹. Assets placed into a lifetime trust are not considered part of your estate, but if you die within seven years of placing assets in trust they may be subject to inheritance tax¹.

Lifetime trusts carry their own charges. You may need to pay inheritance tax when setting up a trust if the value exceeds your inheritance tax allowance, and on each 10-year anniversary of the trust¹. Those who transfer their property to a lifetime trust may face an immediate 20% charge on any balance over £325,000, including gifts made in the previous seven years². On top of that, there may be a further tax bill every 10 years worth 6% of the value over £325,000, plus income tax on any payments from the trust, plus exit charges on assets². An inheritance tax charge is due on every 10-year anniversary if the value of the trust is greater than £325,000, and this can be up to 6% of the value of the trust assets¹.

Where assets are held in a life-interest trust, income tax is based on the beneficiary's tax rate and allowances¹. A vulnerable person's trust receives special tax treatment from HMRC, depends on the beneficiary's tax position, and is not subject to the 10-year inheritance tax charge¹. A disabled person's trust may not pay the same amount of inheritance tax as giving money and property directly to the person⁵.

Pensions and trusts once unused pots count for inheritance tax

Pensions are the area where the rules are changing most. From 6 April 2027, most unused pension funds and death benefits will be included within the value of a person's estate for inheritance tax⁴. For deaths occurring on or after 6 April 2027, pensions will be treated in the same way as other assets, like property⁹. Pension beneficiaries will become jointly and severally liable for any inheritance tax due on unused pension funds and death benefits to which they are entitled, from the point at which they are appointed⁴.

Until then, the position is different. If you die before the age of 75, this money can currently be inherited completely free of tax; if you die after the age of 75, the money will be taxed in the same way as income¹⁰. If the chosen survivor was a spouse or civil partner, the usual inheritance tax exemption would apply⁴.

A trust should be separate from the will if you have a pension, death in service benefits or life cover, and when other people want to contribute⁵. Life insurance is the clearest example. If a life insurance policy is written in trust, the payout is usually exempt from inheritance tax⁹. If your life insurance is not written in trust, the payout will usually be treated as part of your estate when you die¹¹. You can put your life insurance in trust to avoid this, and many life insurers offer this option when you buy cover¹².

Will trust or lifetime trust: which suits which situation

The choice usually comes down to what you are trying to do and when the assets need to move.

A will trust suits couples dealing with a family home owned as tenants in common, and anyone who wants to set conditions on what happens to their estate after they die². It also suits leaving money to a family member who cannot manage it, because the trustees can hold it and decide when to pay out⁸. Because it only takes effect on death, it cannot hold a pension, death in service benefit or life cover³.

A lifetime trust suits someone who wants to put money aside now for a family member who cannot manage money for themselves, for example because they are permanently disabled or too young³. It also suits anyone who wants assets to pass without waiting for probate, since trustees can distribute without a grant of probate or confirmation¹. The costs are the immediate and 10-year charges, and the risk that a local authority treats the transfer as deliberate deprivation if you later need care².

Life insurance sits slightly apart from both. A life insurance policy can be put into trust at any time, when first written or at a later date¹¹. Writing a policy in trust means the money paid out goes to a person you choose, can reduce the amount of tax on the money, and avoids waiting for the estate to be settled; there is usually no charge for this¹³. It does not deal with everything else you leave behind, so a will is still needed¹¹.

Setting up either trust and what it costs

For life insurance, the cheapest route is at the point of sale. You can write a life insurance policy in trust when you first buy it, most insurers offer this during the application, and there is normally no extra charge¹¹. Most insurers will offer it as an option when you initially take out the policy, and there should not be any extra charge¹⁴. One insurer states there is no added cost to putting life insurance in trust with it¹⁵.

Putting an existing policy in trust later is more involved. You can put an existing policy in trust later, but it may involve extra paperwork, and if you need help from a financial adviser or solicitor there could be a cost¹¹. You can contact a legal professional to discuss putting your life insurance into trust, and you will need their guidance to set up a trust deed outlining the terms, trustees and beneficiaries¹⁶.

For other trusts, legal advice is chargeable. You will have to pay for legal advice⁵. A discretionary trust is set up by signing a trust deed, which should be drawn up by someone qualified to do so, such as a solicitor⁸. Where a trust deed is used in a debt arrangement in Scotland, the cost should be clearly set out by your trustee before you commit to the arrangement, and it is based on how much money you can reasonably afford to offer to your creditors each month¹⁷.

Who can be a trustee?

Any adult of sound mind can be a trustee¹⁸. Trustees could be family members, friends or perhaps a solicitor¹¹. For a trust for a disabled family member, you can choose between two and four people as trustees to manage the money or property you are leaving³. Professionals such as solicitors or accountants will charge for their services³.

You can have any number of trustees, though between two and four is usually recommended, and a trust corporation can be a sole trustee⁵. Make sure the trustees are people you will easily be able to contact in future, and ideally they are not also beneficiaries¹⁴. You can select to make your trustee and beneficiaries the same people, though at least one trustee being someone other than a beneficiary may be advisable¹⁶.

Trustees hold real power. In a discretionary trust, the trustees hold the money and assets on trust for your relative and decide whether or not to give them money, though you can give instructions on when you expect them to pay⁸. Putting life insurance in trust transfers control of your policy to someone else, such as a spouse, child or trusted family member, called a trustee¹⁶. You can choose any person, or people, to be your beneficiaries, which entitles them to receive a payout in the event of a claim¹⁵.

There are limits on changing trustees. With some trusts you cannot remove a trustee, but a replacement can be appointed if a trustee dies, wants to be discharged, refuses to act, or is no longer capable¹⁹. Trusts can be restrictive, and some types do not allow changes once you sign the policy¹⁶.

Where trusts go wrong and where to get help

The most common problems are timing, control and cost. Once you put a policy in trust, you generally cannot simply change your mind; depending on the type of trust, it may be difficult to change the beneficiaries or take the policy out of the trust later¹¹. You may be able to change the beneficiaries on your trust, depending on the type of trust agreement you have, but it can cost to change the terms and a legal professional is needed¹⁶. If you use a bare version of a gift and loan trust, you will not be able to change the beneficiary¹⁶.

Care fees are the other trap. Trusts will not protect your home from care home fees²⁰. It is generally not possible to use a lifetime trust to exempt your home from the local authority's calculations of your assets when assessing your care home costs². A local authority may regard the arrangement as deliberate deprivation of assets, and if so it can assess you as if you still owned the property and refuse to fund your care².

There is also a warning about who is selling. Beware of unregulated firms pushing the benefits of lifetime trusts; firms have collapsed, leaving customers facing delays and difficulty accessing assets¹. If you are considering equity release as an alternative way to raise money from your home, switching a lifetime mortgage requires regulated financial advice, even if you stay with the same lender²¹.

For free, impartial help, you can get guidance from MoneyHelper on wills, trusts and later-life planning, and from the Financial Ombudsman Service if you have a complaint about a firm that is regulated. If you are dealing with debt rather than estate planning, StepChange and National Debtline offer free advice, and a trust deed in Scotland is a formal debt solution rather than an estate planning tool¹⁷.