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Peter DanielPartner - Head of Private Wealth
Created by your will and taking effect on death, a will trust can be an effective way of passing wealth to your loved ones while avoiding unnecessary Inheritance Tax.
What is a will trust?
Will trust is an umbrella term. It describes any trust that is created by your will and activates upon your death. There are several types of will trust available and each one is suitable in a different situation. These include discretionary trusts, where trustees have broad discretion as to how much of the trust assets are paid to which beneficiary and when, and Immediate Post Death Interest.
Trusts (IPDI) are where the trustees must pay income to a specific beneficiary during their lifetime, but someone else is entitled to the assets and investments of the trust. As a first step, we will meet with you to understand your reasons for creating a trust and the people you wish to benefit from it. We can then help you decide which type of will trust is right for your particular circumstances.
How is a will trust created?
You declare the trust in your will: which will then go on to specify
- the assets or the proportion of your estate over which the trust applies
- who shall be the trustees and what shall be their powers
- who shall be the beneficiaries and what shall be their entitlements.
The trustee must have sufficient information to understand your wishes. We can make sure that your will meets these requirements and also advise on other key issues to consider.
Why should I make a will trust?
Will trusts are a valuable estate planning tool? Most often, they are used to:
- provide you with more control over how your estate is distributed on death
- place conditions or restrictions on inheritance, such as age limits for when beneficiaries gain access to funds
- protect vulnerable persons, such as children or those lacking mental capacity, by specifying who should manage their finances until they reach a certain age
- name people who haven’t yet been born to be beneficiaries, such as future grandchildren and great-grandchildren
- set up a charitable trust so contributions can be made to your preferred causes
- avoid “sideways disinheritance” by making sure that a second (or subsequent) spouse is provided for during their lifetime while ensuring the estate is passed to the children of a previous relationship after their death
- minimise inheritance tax and take advantage of available tax relief
What are the disadvantages of using a will trust?
There are no obvious disadvantages in starting out with a flexible trust although advice should always be taken when the will is made so that full account is taken of your circumstances. It is important to select appropriate assets for the type of trust decided on and given that personal, financial and fiscal circumstances are susceptible to change to keep your will under review.
If the trust is an IPDI then it is looked through for the purposes of Inheritance Tax and the assets are currently treated for the purposes of that tax as if they belonged to the beneficiary entitled to enjoy them. Otherwise, there may be exit charges when distributions are made and a charge to Inheritance Tax at each 10-year anniversary, at the same rates as for lifetime trusts, if the trust is not brought to an end within two years of the death.
If you would like to discuss setting up a will trust or have any other questions about trusts and estate planning, please get in touch with our team. We are here to help.
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