Help me understand trusts

I was talking with friends and the conversation came around to asking about trusts. So, even though this is oversimplified, I explained it like this.

1) If Nikki has £50 in the bank but dies without a Will, set rules (intestacy) decide who gets the £50. Occasionally, HMRC takes £20 (40% inheritance tax) for themselves.

2) If Nikki gives her husband, Chris, £50 as a gift, he legally and morally owns the £50. If he spends it or loses it, there is nothing left.

3) This time, Nikki gives Chris £50 and says, please use this to buy us both a takeaway on your way home from work tonight; if there is enough money left, get something for the kids as well. Nikki Trusts Chris to get the takeaway, and anything left over is for the kids. Nikki has created a Simple Trust.

Both Nikki and Chris are the first beneficiaries (because they benefit first), and the kids get the remainder second, so they are "remaindermen"/secondary beneficiaries' 

Chris is the Trustee because he was trusted to look after the £50.

The Trust fund is £50.

The trust's terms are, "Buy a takeaway for us to share this evening; consider the kids."

If Tony then says, "Chris, do you want to have a drink in the pub?". Even though Chris has £50, he can't use it for that because it is against the terms of the trust, which is enforceable by law (and a heavy frying pan, but that's a different story). He is also morally bound to try to buy a reasonably affordable takeaway to ensure enough for the kids.

If Nikki had written a note saying ideally to get a takeaway, but if something comes up, use your discretion (Discretionary Trust). If the takeaway was shut, he could get an M&S meal for two instead because that is in the spirit and guidance of the Trust. Going to the pub still is not; sorry, Tony.

OK, I hear you say, but what about the real world?

Nikki and Chris own a home together. If Nikki dies without a Will Trust, the family home goes to Chris. The house is worth £650k. If Chris later needs care home fees or debt consolidation, the house and its value could be lost. If he remarries, the new partner could inherit the house. In either scenario, the children will not get the house. 

Chris's house alone, is now double the £325k Inheritance Tax Threshold (IHT) without including savings, etc., so his beneficiaries could potentially face £130k+ inheritance tax (£325*40%), and the house may need to be sold to pay for it. (Children & Spouse exemptions apply).

This is where the Trust comes in.

If Nikki split the house 50/50 and wrote, "Chris can live in this home as long as he needs, then give my 50% to the children afterwards." I also want my brother and eldest child to help you (the Trustees) make decisions about the house (the Trust). Chris now has a home for LIFE but can't spend it, give it away, or lose it.

If Nikki added a detail allowing for a bit of Flexibility and Discretion and later Chris needed expensive medical treatment or the kids needed help buying a first home, then if Chris, his brother-in-law, and the eldest child agreed (The trustees), some of the trust funds could be used for these purposes. Nikki could also prepare a helpful note for everyone explaining in more detail what she would like to happen (Letter Of Wishes); this removes the burden of guilt or indecision from the Trustees faced with difficult decisions.

Then, if Chris remarried, went into residential care, or passed away, Nikki's 50% of the house would pass to the children, with the first £1m tax-free (Subject to tax regime at the time). This could also be held in trust at the trustee's discretion until the children reach a pre-agreed age.

I certainly don't want to trivialise the matter, though we can add "layers and players" until it matches precisely what the family needs, now and in the foreseeable future.

What you have now is a Flexible Life Interest Trust that converts into a discretionary trust and can save tens of thousands in tax, care home fees or debts. The lifestyle and property are protected for Chris and the children. At potentially 1000/1 savings against the cost of setting up the Will Trust, it is a simple choice if it is right for you.

Of course, no, one size fits all, and there are other considerations, but I hope this helps.