Will Trust

What is a Will Trust?

A will trust, also known as a testamentary trust, is a trust created by a will that comes into effect upon the testator’s (the person who made the will) death. The will specifies the terms of the trust, including the appointment of trustees, the identification of beneficiaries, and instructions on how the assets are to be managed and distributed.

Types of Will Trusts

There are several types of will trusts, each serving different purposes and offering various benefits:

1. Discretionary Will Trusts: These trusts provide trustees with the flexibility to decide how and when to distribute assets to beneficiaries. This type of trust is particularly useful when beneficiaries’ circumstances are likely to change over time, or when the testator wishes to protect assets from potential risks, such as creditors or divorce settlements.
2. Life Interest Trusts: Also known as interest in possession trusts, these trusts grant a beneficiary (often a spouse or partner) the right to receive income from the trust or live in a property owned by the trust for their lifetime. After their death, the assets are transferred to other beneficiaries, typically children.
3. bare trusts: In a bare trust, the beneficiary has an absolute right to the trust’s assets. This type of trust is often used to hold assets for minors until they reach adulthood.
4. Flexible Life Interest Trusts: These trusts combine discretionary and life interest trust elements. They provide a life interest to a primary beneficiary, such as a spouse, while allowing trustees to distribute assets to other beneficiaries if needed.
5. Nil Rate Band Trusts: These trusts maximise inheritance tax (IHT) allowances by utilising the nil rate band (the amount that can be passed on free of IHT). They can be structured to pass on assets up to the nil rate band limit to a trust, reducing the overall IHT liability of the estate.

Benefits of Will Trusts

Will trusts offer a range of benefits, making them an attractive option for estate planning:

1. Asset Protection: Will trusts can protect assets from creditors, divorce settlements, and other claims. By placing assets in a trust, they are not considered part of the beneficiary’s estate, offering a layer of protection.
2. Tax Efficiency: Trusts can help manage and reduce IHT. By strategically placing assets in a trust, you can take advantage of various tax allowances and reliefs, potentially reducing the tax burden on your estate.
3. Control and Flexibility: Will trusts allow you to maintain control over how and when beneficiaries receive their inheritance. This is particularly useful for ensuring that young or vulnerable beneficiaries are provided for appropriately.
4. Provision for Dependants: Trusts can ensure that dependents, such as minor children or disabled family members, are provided for according to your wishes.
5. Continuity: Trusts provide a mechanism for managing family wealth across generations. They can ensure that assets are preserved and used according to your wishes, even after your death.

Setting Up a Will Trust

Setting up a will trust involves several key steps:

1. Drafting the Will: The first step is to draft a will that includes provisions for the trust. This should be done with the assistance of a solicitor to ensure it meets legal requirements and accurately reflects your intentions.
2. Choosing Trustees: Trustees play a critical role in managing the trust. It is important to choose individuals or professional trustees who are trustworthy, competent, and capable of managing the trust in the best interests of the beneficiaries.
3. Defining the Trust’s Terms: The will must specify the terms of the trust, including who the beneficiaries are, what assets are to be included, and how those assets should be managed and distributed.
4. Legal and Tax Advice: It is essential to seek expert legal and tax advice to ensure the trust is set up in the most tax-efficient manner and complies with all legal requirements.
5. Execution of the Will: The will must be properly executed, meaning it should be signed and witnessed in accordance with legal formalities.

Trustees’ Responsibilities

Trustees have significant responsibilities and must act in accordance with the terms of the trust and the law. Their duties include:

1. Fiduciary Duty: Trustees have a fiduciary duty to act in the best interests of the beneficiaries. They must manage the trust’s assets prudently and avoid conflicts of interest.
2. Record-Keeping: Trustees must keep accurate records of the trust’s assets, income, and expenses and provide regular reports to beneficiaries.
3. Tax Compliance: Trustees are responsible for ensuring the trust complies with tax obligations, including filing tax returns and paying any due taxes.
4. Investment Management: Trustees must invest the trust’s assets in a way that balances risk and return, considering the needs of current and future beneficiaries.
5. Distribution of Benefits: Trustees must distribute benefits to beneficiaries in accordance with the trust deed. In discretionary trusts, this involves making decisions about who receives benefits and when.

Taxation of Will Trusts

The taxation of will trusts can be complex, and it is essential to understand the implications:

1. Inheritance Tax (IHT): Assets placed in a will trust may be subject to IHT. However, there are exemptions and reliefs available. For example, the nil rate band and the residential nil rate band can be utilised to minimise IHT.
2. Income Tax: Trusts are subject to income tax on the income they generate. The rate depends on the type of trust and the nature of the income. Discretionary trusts are subject to the highest rates, while bare trusts are taxed at the beneficiary’s rate.
3. Capital Gains Tax (CGT): Trusts are subject to CGT on asset disposals. Trustees are entitled to an annual exemption, but gains above this threshold are taxed at the applicable rate.
4. Trust Registration Service (TRS): Trusts must be registered with HMRC’s Trust Registration Service, which requires the provision of detailed information about the trust and its beneficiaries.

Potential Challenges and Considerations

While will trusts offer many benefits, there are potential pitfalls to be aware of:

1. Complexity and Costs: Setting up and managing a trust can be complex and costly. Professional advice and ongoing management are often required, which can incur significant fees.
2. Tax Implications: Trusts can have complex tax implications, and it is essential to seek expert advice to ensure tax efficiency and compliance.
3. Loss of Control: Once assets are transferred to a trust, the testator can no longer control them. Trustees are responsible for managing the assets in accordance with the trust deed.
4. Legal and Regulatory Requirements: Trusts must comply with various legal and regulatory requirements, and failure to do so can result in penalties and other consequences.

Case Study: A Practical Example

o illustrate the practical application of a will trust, consider the following case study:

Mr. and Mrs. Jones wish to ensure that their estate is managed effectively and that their children and grandchildren are provided for after their deaths. They decide to set up a will trust.

1. Drafting the Will: Mr. and Mrs. Jones draft a will that includes provisions for a discretionary will trust. They appoint their solicitor and a trusted family friend as trustees.
2. Defining the Trust’s Terms: The will specifies that the trustees have discretion to distribute income and capital to the beneficiaries, who are their children and grandchildren. The will also outlines provisions for the trustees to provide financial support for Mr. and Mrs. Jones’ surviving spouse if needed.
3. Legal and Tax Advice: They seek expert legal and tax advice to ensure the trust is set up in a tax-efficient manner and complies with all legal requirements.
4. Execution of the Will: The will is properly executed, with Mr. and Mrs. Jones signing it in the presence of two witnesses.
5. Management of the Trust: After their deaths, the trustees manage the trust’s assets, ensuring that income is distributed to the beneficiaries per the trust’s terms. The trustees also work with a tax advisor to ensure tax compliance and efficiency.

By setting up the will trust, Mr. and Mrs. Jones achieve their goal of providing for their family while maintaining flexibility and control over how their assets are managed and distributed.

Conclusion

Will trusts are powerful tools for managing and protecting your estate. They offer numerous benefits, including asset protection, tax efficiency, and control over the distribution of assets. However, setting up and managing a will trust requires careful planning, expert advice, and ongoing management to ensure compliance and effectiveness.

At DLS Solicitors, we are committed to providing expert guidance and support to individuals considering setting up a will trust. Our team of experienced solicitors can help you navigate the complexities of will trusts, ensuring your estate is managed and protected in line with your wishes.

If you are considering a will trust or need advice on an existing trust, please do not hesitate to contact us. We are here to help you secure your family’s financial future.