🧾 Trusts for Parents: Should You Set Up a Lifetime Trust or a Will Trust?

 

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🧾 Trusts for Parents: Should You Set Up a Lifetime Trust or a Will Trust?

👨‍👩‍👧‍👦 Why This Matters

As parents, especially those of children with additional needs, we often carry the silent worry:
"What will happen to my children if something happens to me?"

Setting up a trust can be a powerful tool to secure their financial future, protect assets, and reduce tax. But there’s a big choice to make:

❓ Should you create a Lifetime Trust now, or include a Trust in your Will (Testamentary Trust)?

Let’s break it down — especially if you're thinking about both a special needs child and a typical child, and possibly passing on your home.

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1. ✅ Lifetime Trust – Great for a Vulnerable Person’s Trust (VPT)

If you have a disabled or vulnerable child, a Vulnerable Person’s Trust (VPT) is one of the most generous and tax-efficient options available – but only if it qualifies under Section 89 of the Inheritance Tax Act 1984.

🔍 Key features of a Lifetime VPT:

• No 20% inheritance tax on transfer, even above the nil-rate band

• No 10-year periodic or exit charges

• Income and gains taxed at your child’s personal rate (often much lower)

• ✅ Peace of mind: You know the trust exists and is functioning during your lifetime

⚠️ But there are important restrictions:

• The trust must benefit the disabled person 100% (after April 2013 rules)

• You (the parents) cannot take the money back

• Funds are locked for your child’s benefit only — no flexibility later if your situation changes

• If conditions are not met, the trust loses its tax benefits and becomes a costly discretionary trust

👇 Example:

One parent in our group is setting up a lifetime VPT for their autistic son — a beautiful step, showing care and foresight. But they're also thinking about a lifetime discretionary trust for their other child. That second trust may bring unnecessary tax unless carefully structured.

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2. ✅ Will Trusts – Better for Other Children and Your Home

If your other children are not disabled, a trust created through your Will is usually better and more tax-efficient than a lifetime discretionary trust.

You can use:

🏡 Protective Property Trust (PPT) – Ideal for your family home

• Ensures your spouse or partner can live in the home for life

• After their death, your share passes to your children or chosen beneficiaries

• Prevents your children’s inheritance being lost to:

  • A remarriage

  • Care home fees

  • Future disputes

• Can be combined with residence nil-rate band (RNRB) for additional IHT savings

🔄 Flexible Life Interest Trust (FLIT) – Ideal for adult children or spouses

• One person gets income for life

• Capital can be distributed later to other family members

• Offers a balance between control and tax efficiency

• No 20% entry charge, no 10-year charges (if structured through Will)

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3. ⚖️ Comparing the Options

Trust Type	Best For	Tax on Setup	IHT Benefits	Flexibility	Key Considerations
VPT (Lifetime)	Disabled child	£0 if qualifying	✅ Full exemption	❌ Locked for child only	Must meet Section 89 conditions
Bare Trust	Simple gifts	PET (IHT-free after 7 years)	✅ Yes	❌ No control	Beneficiary owns asset
Discretionary Trust (Lifetime)	Asset protection	20% IHT over £325k	❌ High tax	✅ Full control	Expensive and inflexible
FLIT (Will)	Spouse or adult child	No charge	✅ Estate planning use of NRB	✅ Income + future control	Must be done via Will
PPT (Will)	Family home	No charge	✅ Use of RNRB + asset protection	⚠️ Fixed structure	Ideal for preserving property for children

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4. 💡 Key Takeaways for Parents

✔ Use a Lifetime VPT for your special needs child

• Excellent tax benefits

• But remember: you cannot use the funds later

• Must be for the child’s benefit 100%

✔ Use a Will-based trust (FLIT or PPT) for your other children or home

• More flexible and cost-effective

• Avoids the 20% IHT entry charge of a lifetime discretionary trust

• Preserves your home and legacy for the next generation

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🧠 Final Thought

Setting up a trust is not just about taxes — it’s about protecting your children in a way that reflects their unique needs.

🔒 A VPT is like locking a vault for your vulnerable child – safe, secure, and sealed.
🏠 A Will Trust is like drawing a long-term roadmap — flexible, protective, and family-oriented.

Let’s keep asking the right questions, learning from each other, and building a future where our children are safe and supported — even when we’re not around.