Trusts often get a bad press, being portrayed by some as vehicles to help the super-rich to avoid tax. While trusts can legitimately save tax for many people (most of whom are not super-rich!) their purpose is often to protect the position of loved ones.
Making a will involves consideration of many different factors and you should always consider, not only who you would like to benefit but how they should benefit. While the simplicity of outright giving will be appropriate in some circumstances, there are situations in which it may be more appropriate to protect the beneficiaries with some form of will trust.
- What is a will trust?
- Who are the trustees and what do they do?
- How does a will trust protect my family?
- How are will trusts taxed?
A will trust can be thought of as a gift ‘with rules attached’. If you leave your assets to someone absolutely, you give total benefit and control of the assets given to them. They will own the assets and have the right to do with them as they wish. In contrast, where you leave assets to a will trust, you transfer ownership to trustees, who are charged with managing the assets for the benefit of beneficiaries. The will sets out who the trustees and beneficiaries are and the rules the trustees have to follow.
Some will trusts can be very simple, for example if you leave assets to your trustees to hold for the benefit of your child when they reach age 18. It’s also possible to create more flexible trusts that give trustees discretion to decide who should benefit from capital or income and when that should be. You can also give different beneficiaries different rights, for example giving one person the right to benefit from the income generated by an asset, or to occupy a property for a set period, and giving other beneficiaries the benefit of the asset at the end of that period.
When you die, you give away all the assets in your estate under the terms of your will (assuming you make one, which you should!). For many people, this involves a significant transfer of wealth. It’s a good idea to consider whether you’re comfortable transferring that wealth absolutely or you would prefer to use a trust.
The role of a trustee is to manage the assets in the trust and to exercise any discretions they are given. Depending on the wording of the trust, beneficiaries can act as trustees. You could also appoint outsiders such as trusted family members or friends or professional trustees.
The role of trustee is a very important one and (as the name suggests) you should certainly choose people you trust! It is always sensible to take professional advice on the options and the factors to consider when deciding who to appoint.
You choose the initial trustees of a will trust under the terms of your will. You can either appoint the executors named in your will or separate trustees.
There are many different forms of will trust for different purposes. The protections offered and tax consequences will depend on the type of will trust chosen and you should always take professional advice on the different options.
Here are some of the many situations where an appropriately worded ill trwust can protect your beneficiaries:
Where there is more than one family
If you, or your partner, have been married before or have children from a previous relationship, you might be concerned to ensure that your assets ultimately pass to your own children or family, while also looking after your spouse, if they survive you. A will trust can help to achieve this.
Where the surviving spouse may remarry or form a new relationship
Many people worry that if they leave their assets to their surviving spouse, their children may not inherit if the survivor remarries or forms a new relationship. Even if the survivor does not give away or leave the assets to their new partner, problems can still arise. For example, the new spouse might have a claim on assets if the new marriage ends in divorce, or they might make a claim for financial provision from the estate of the surviving spouse. Again, a will trust can reduce the risk of such problems.
Where the intended beneficiaries may be at financial risk
There are many situations where wealth left to a beneficiary may not end up going where intended, or may do them more harm than good, for example:
- where the beneficiary is getting divorced or going through marital difficulties, there’s a risk that the inheritance may be included or taken into account in any divorce settlement.
- where the beneficiary (or their partner) is immature, reckless, bad with money or at higher than usual risk of bankruptcy (for instance if they are engaged in risky business enterprises).
- For young or otherwise vulnerable beneficiaries.
A will trust can reduce the risk of such problems arising.
Where an inheritance might affect the beneficiaries’ means tested benefits
will trusts can often prevent the loss of a beneficiary’s means tested benefits,or reduce the impact of the inheritance on the benefits available.
Where an inheritance might complicate the beneficiaries’ tax position
An outright inheritance might complicate the beneficiary’s tax affairs if, for instance, they pay income tax at a high rate or their estate will be liable to inheritance tax on their death. While this is a complex area, the flexibility of will trusts can alleviate such problems, giving scope for some of the wealth to be used in a more tax efficient manner. For example, a child with significant wealth might prefer some of the trust fund to be used for their own children instead of them. A will trust can give the flexibility to focus the estate in the most tax efficient manner, depending on the circumstances at the time.
Where substantial wealth is involved
Substantial wealth (particularly when acquired suddenly) can cause its own problems. For example, it can affect a beneficiary’s outlook on life or the attitudes of those around them or increase their tax exposure. So it’s sensible to consider using a trust when passing down substantial wealth, even where the beneficiaries do not otherwise seem in need of protection.
There are important tax issues to consider with will trusts including capital gains tax and income tax. The rules are extremely complex so it’s vital that you get specialist tax advice.
We’ve set out a couple of illustrative case studies of situations where a will trust might be useful.
Will trust case study 1
Gill, aged 70, has an estate worth £800,000 including her home (which is in her sole name), which she occupies with her second husband, Brian. She has two adult children (Simon and) Beth) from her first marriage, which ended in divorce. Brian does not have significant assets and is largely dependent on Gill. Brian also has two children from a previous relationship.
Gill would like to look after Brian if he survives her, but also wants to make sure that her assets pass to her children, after his death.
If Gill leaves the assets outright to Brian, then he will decide what to do with them during the rest of his lifetime and who to leave them to after his death. If Gill is uncomfortable with this, then she could use a will trust to control what happens to her estate after her death.
Will trust case study 2
Jake is a widower with an estate worth approximately £5million. He wants to provide for his three adult children, Karen, John and Steven and their children after his death. However, he knows that Karen’s marriage is in difficulty and Steven has had money problems in the past. John has significant wealth of his own and has mentioned that a large inheritance might cause tax problems.
Again, a will trust could be used to protect the shares of Karen and Steven and give flexibility for John’s children to receive some of the trust fund instead of John, if this is more tax efficient.
Chat to the Author, Nicola Havers
Executive Partner - Will, trusts, tax & probate, Bishop's Stortford officeMeet Nicola
Legal 500 UK 2021
‘I have dealt with Nicola Havers as executor on probate matters and as a trustee for a family trust. – she operates with calmness, tact, and diplomacy. Nicola is an efficient case manager. She brings in additional specialist advisers at the appropriate stages to supplement her own advice.’