Many of our clients choose to include Trusts in Wills to protect the people they love, and give greater control over what happens to the gifts they make. Here Nicola provides an overview of their uses and a simple explanation of how they work.
What is a Trust?
In its simplest terms, a trust is a legal arrangement whereby property is transferred to one or more people (the trustees) to be held by them for the benefit of one or more persons (the beneficiaries). The trustees hold the legal title to the assets, and manage them on behalf of the beneficiaries, who have the potential to benefit from them.
Instead of writing a “basic” Will, where all your assets go directly to those you love, including Trusts in Wills can give additional benefits by protecting the people you love. They can also give you greater control over what happens to the gifts you make in your Will. Your inheritance isn’t passed directly to your beneficiaries, but into a fund with trustees, appointed by you. Your trustees manage and control the asset for the future.
How does a Trust work?
If you imagine a Trust as an envelope, into which you place items of value. The names of the people you may want to have those items are written on the front, along with a date that the envelope can be opened and the contents distributed. You may choose to write some guidance and put it inside. The envelope is sealed and given to someone you trust to look after.
On occasion, they can open the envelope, take out some of its contents and pass it to those named on the front. This could be for a special event, a specific need, based on your guidance, or simply at their discretion.
When the trusts ends (at the date on the envelope), the envelope is opened one final time. What is left inside is given to those named on the front. Keeping those items in the envelope means they are kept safe and looked after by others. They can’t be lost, squandered or depleted.
Many people think you need a large estate to have a trust – but that isn’t always the case. Here we provide some information about trusts and why you may want to include one in your Will.
Who needs a Trust?
Trusts in Wills can be useful for those with:
Adult children – protect their inheritance from future divorce, bankruptcy, benefits means testing or inheritance tax.
Second families – protect your own children’s future in case your partner remarries.
Property ownership – leave your share of the property in trust in case your partner remarries or needs long term care. Or leave someone the right to live there.
Disabled children – protect their benefits and care, and give them financial assistance.
At risk adults – those who are vulnerable or susceptible to alcohol, drug or gambling issues may need help managing money. Or even those who may be vulnerable to “predatory marriage”.
An example of how a Trust in your Will can provide protection
You and your husband are in a second marriage, and you both have adult children from your previous relationships. You make make a Will leaving everything to each other and then shared equally between all your children. When you die your share of your home, and your savings and ISA go to your husband.
Eventually he remarries. At this time, his Will is revoked by law. If he doesn’t make a new Will, his new wife would be entitled to most, if not all, of his estate. Your children would lose out completely. We often call this “accidental disinheritance” as many couples don’t realise this could happen.
Instead of leaving to your husband directly, you can leave your home / other assets in Trust. Your husband can use them while he is alive, but when he dies they automatically go to your children. If he remarries then only his assets could go to his new wife. Your own assets are safe in the trust and cannot be lost if he does remarry, or changes his Will, or gets into financial difficulties.
Different Types of Trust
Not all trusts in Wills are the same. Some are much simpler than others, but they all mean the assets are not directly owned by your beneficiaries. Here are some types of trust that can be useful to protect your assets. Some are more complex than others, and we will always advise what suits your circumstances best.
Bare Trusts
This is the simplest form of trust, where a particular person has the right to the assets at a given time. The most common is money held by your trustees for your children until they are old enough to inherit.
Life Interest Trusts
These are trusts where a particular person has the right to income from a trust. They can have the use of assets during their lifetime, and when they die the assets pass to your chosen beneficiairies.
A simple example of this is a Property Protection Trust. You leave your share of your home into a “Life Interest Trust” when you die. Your wife has the right to live in the house for a period of time, or until death. She also has the right to any income (e.g. if she travelled and rented the house out). But she never “owns” that share, she just has an “interest in possession” . When the trust ends (on her death or an agreed other date), your share of the house passes to your children.
You can use a Life Interest Trust for shares in one or more properties, other monies, shares and other assets. It gives protection to your spouse/partner for an agreed period, but also ensures the assets go to your chosen beneficiaries.
Discretionary Trusts
In these types of trusts, as the name suggests, their is some discretion over who benefits. You leave assets in a trust and provide guidance to your trustees (in an accompanying letter) about who could benefit. Your trustees have the discretion over when and to whom payments are made.
When you leave assets in a Discretionary Trust, they are never owned by your beneficiaries and they have no guaranteed right to them. Consequently, they are protected against being lost to divorce or bankruptcy. They are also not counted when a beneficiary claims means-tested benefits. And are not in their estate for inheritance tax purposes either.
You can also use a Discretionary Trusts where one of your family is vulnerable. They may not be able to manage money for themselves. Or they could have a particular challenge with e.g. gambling, addiction etc and may not be responsible enough to deal with finances.
You may want to provide a fund for your grandchildren for the future, but you aren’t sure what their circumstances may be as they grow. Your trustees could hold money and then, for example, decide to pay for university fees, or a car, or a deposit for a property.
You can also protect business assets in a Discretionary Trust, helping protect against future Inheritance Tax changes for family who inherit.
Flexible Trusts
Flexible Trusts are a way of combining Life Interest and Discretionary Trust, allowing assets to be used by your spouse during their lifetime. Additionally, your wider family can benefit during that time too. And when your spouse dies, the remaining assets move into a Discretionary Trust for long term protection. They are often seen as an ideal modern family trust.
These are the main types of trust. Each has its own benefits, taxation rules and complexity.
At your Will appointment, we will discuss the options with you as needed. We will explain the risks to your estate, and the way you can minimise them using trusts in Wills. Our friendly team will never push you to do something you aren’t comfortable with, but you will be able to make decisions based on all the facts!
Contact us today to start a conversation about how Trusts in Wills can help protect you, your partner and your family for the future. You can call us on 01524 571032 or ask us for more information here
NOTE – this blog only covers Trusts in Wills. It does not cover “Lifetime” or “Living” Trusts. In these trusts, you gift assets into trust in your lifetime, rather than in your Will.