Advice On The Use Of Will Trusts

In the past Will trusts were an essential estate planning tool, often used to mitigate inheritance tax where the value of an estate was above the inheritance tax threshold.

However, it is now possible to transfer any unused inheritance tax allowance to the estate of a spouse or civil partner, so the need for Will trusts is much less.

However, there are still occasions where the use of a Will trust might useful.

What is a Trust?

A trust is created when you ask someone you trust (the trustee) to hold assets for the benefit of someone else (the beneficiaries) i.e. your children. The trustee will hold, invest and manage the assets for the benefit of the beneficiaries in accordance the terms of the trust and subject to their duties as a trustee.

The trustee will also be responsible to deal with the administrative tasks such as registering the trust with HMRC, filing tax returns, and preparing accounts.

Throughout the trust period, it is open to the trustee (subject to the terms of the trust) to use their discretion to make payments of capital and/or income to beneficiaries who might need it for education, maintenance, or their general benefit. Trusts can therefore be quite flexible as they can make provision for beneficiaries, whilst protecting the assets at the same time.

Trusts can particularly useful when included in a Will as they can be used to protect assets against remarriage and the long term impact of care, to make provision for disabled or vulnerable beneficiaries and to provide for beneficiaries who might need protecting from themselves.

What sort of Will trusts are there?

Life Interest Trusts

Life Interest Trusts are useful to protect a share of your property against the effects of remarriage by a surviving spouse or civil partner and/or the long-term effects of care. These trusts are also popular where couples have children from previous relationships and are concerned to ensure that their respective children inherit their estates.

Life Interest Trusts work by giving the surviving spouse or civil partner the right to either live in the property or receive the income from it (i.e. rental income or investment income if the house has been sold and the proceeds of sale invested) for life. The capital will pass to your chosen remainder beneficiaries (i.e. your children) when the surviving spouse or civil partner dies or ends the trust sooner.

This means that if the surviving spouse or partner was to remarry or require long term care after your death, your share of the property would not be used to pay for their long-term care, and it would not be an asset that they could take into a new marriage.

Discretionary Trusts

Discretionary Trusts are useful when you wish to benefit individuals, but you have some reservations about giving them large sums of money outright. For example, you might be concerned about their young age, future divorce, bankruptcy, overbearing partner, or excessive spending habits.

Discretionary Trusts are also a good way of providing for future generations who may not be born yet.

The beneficiaries of a Discretionary Trust do not have a right to any of the assets, they just have a hope of receiving something from the trust at some point in the future, if this is what the trustees decide i.e. at their discretion. The trustees have the ultimate decision making powers as to when to pay out of the trust, to whom and in what amount. It is possible for you to leave a non-binding letter of wishes to your trustees, setting out what you would like them to think about when considering making a payment out.

Disabled Person’s Trusts

Disabled Person’s Trusts are a useful way of providing for a Disabled Person who may not be able to hold assets themselves and without affecting their means tested benefits.

18-25 Trusts

When making provision for children, parents may be concerned at the prospect of the children inheriting potentially quite large sums of money at the age of 18. An 18-25 trust is a useful way of deferring a child’s entitlement to the capital (as they will be entitled to any income from 18) until an age up to 25. These trusts also benefit from favourable tax treatment.

What else do I need to bear in mind?

When considering including a trust in your Will, it is important that you seek specialist advice so that you fully understand how the trust works, and what the potential tax and registration requirements are.

For further information regarding the above or if you would like to discuss a Wills & Probate related query with one of the team, please call us on 0800 011 6666 or e-mail the team at legal@timms-law.com.