A Guide to Will Trusts

Jenny Walsh

What is a trust in a will ?

Setting up a trust in your will can protect assets for your loved ones while protecting your estate from unnecessary inheritance tax. Will trusts are versatile structures and can be tailored to fit the needs of you and your estate.

A trust is a legal arrangement that allows you to place assets (cash, property, investments) under the control of a trustee who will manage the assets for the benefit of beneficiaries. A will trust is simply a trust that you create in your will. The trust comes into effect when you die.

Who should set up a will trust?

If you know who you wish to inherit your wealth and are happy for assets to be transferred to the beneficiaries as soon as you die, then a well-written will can achieve that for you. There would be very little reason to set up a trust.

Trusts are usually established when your wishes cannot be achieved with a simple will. For example, if you would like a more structured release of assets, there are minor children or vulnerable adults involved, or you fear that beneficiaries may fritter funds away, then a will trust can be a useful tool. They allow you to create conditions and timelines that must be met before assets are distributed.

• Related article: The Benefits of Early Inheritance Tax Planning

What are the different types of will trusts?

There are many different types of trust that you can establish in your will. The more popular options include:

• A bare trust which gives named beneficiaries the right to receive both income and capital from the trust. This simple form of trust is often used for minor children who are not able to take legal title themselves.
• A discretionary trust which gives the trustees broad powers to decide which of the beneficiaries receives funds from the trust, how much they receive and when they receive it. This flexible trust is often used to benefit future generations as you can specify a class of beneficiaries, such as “my grandchildren and their descendants.” The beneficiaries do not have to be named individually or even be born yet.
• A life interest trust which gives someone the right to enjoy an asset during their lifetime but without ever owning the asset itself. This is often used to allow a spouse to continue living in the family home for as long as they wish but ultimately, the property will pass to children from a previous relationship.
• A vulnerable beneficiary trust (sometimes called a disabled person’s trust) which holds assets for someone who is disabled, or for a child whose parent has died. If the trust qualifies, the trustees can ask HMRC to tax its income and gains broadly as if they belonged to the beneficiary, which is usually less than a standard trust would pay. The trust is also free of the usual 10-yearly Inheritance Tax charge.
• A bereaved minor’s trust which can be set up in the will of a parent who has died, and can also arise under the intestacy rules where there is no will. The child must become entitled to the trust assets outright by the age of 18. In return, the trust avoids the 10-yearly and exit charges that normally apply to trusts for Inheritance Tax.
• An 18-to-25 trust which can also be set up in the will of a parent who has died, but lets the child wait until as late as 25 to receive the assets outright. There is no 10-yearly charge, but a reduced exit charge applies if the child becomes entitled after turning 18, based on how long the trust continued past that birthday.

What are the benefits of using a will trust?

Besides ensuring that your family are protected in the exact way you want, a will trust can:

• Take advantage of all available tax reliefs and thus minimise Inheritance Tax
• Protect your assets from divorcing partners or creditors
• Protect your estate against possible care home fees in the future
• Ensure that a current partner and children from a previous relationship are provided for
• Leave assets for the benefit of vulnerable or disabled persons who may not be able to manage their finances on their own.

What are the disadvantages of using a will trust?

Like any trust, will trusts can be time-consuming to set up and the trustees have a lot of administration responsibility on their shoulders without much reward. Will trusts have their own tax and legal requirements, which can be very complex. It’s important to have experts on your side from the beginning to ensure that the trust is set up as robustly and tax-efficiently as possible. Trustees will often need the ongoing support of trust experts if they are to carry out their roles correctly. Disagreements can also arise between trustees and beneficiaries over how a will trust is administered — if this happens, our trust dispute solicitors can help resolve the issue.

Who needs a trust instead of a will trust?

A trust becomes effective at the time the assets are transferred into the trust. With a will trust, that happens upon death. Other trusts, called living trusts, become operative during your lifetime. With a living trust, the trustees take control of your assets immediately. This can be useful in certain situations, such as if you are unable to look after your own affairs due to illness or incapacity or if you wish to shield assets from future lawsuits and claims.

There are pros and cons to both will trusts and living trusts. Both potentially have a role to play as part of a comprehensive estate plan and should be discussed with your solicitor to determine which one is right for you.

How we can help?

Speak to a specialist trusts lawyer about a will trust. Contact us to get started. Call 020 7485 8811 or fill in the contact form below.