Guide to Using a Trust in a Will
26 February 2016
There are many different ways you can use Trusts in a Will and they can be a very good way to manage your financial assets and protect them for the future. In England and Wales, Trusts can be put in place when you are alive or set up in a Will (which becomes active when you die).
You may wish to use a Trust for specific reasons, for example, setting up a Trust for your children which only becomes accessible once they turn 18 or over. Alternatively you may use a Trust to benefit someone who lacks capacity due to illness or disability to manage their own financial affairs.
When setting up a Trust in your Will, there are two main roles that need be filled and here are some of the terms you will hear when setting up a Trust.
- Trustees – these are the people you appoint to manage the Trust.
- Beneficiaries – these are the people who are entitled (or potentially entitled in some cases) to the income and/or capital from the Trust.
The Trustees legally own the assets that are held in Trust and they have to ensure that they carry out the terms of the Trust and act in the interests of the beneficiaries. The Trustees are responsible for making decisions on how to use the assets in the Trust within the parameters of the terms of the Trust and their statutory obligations.
Setting up a Trust in a Will is more complex that a writing a standard Will so it's vital to get advice from a specialist about what type of Trust is best for your circumstances.
Here is a quick guide to the types of Trusts available and what they are commonly used for.
The main purpose of Property Trusts is to protect your property. It is typically used where a couple want to provide for each other when they die, but rather than leave their entire Estates to each other, they make a property Trust to gift their share of their home to the other. When they die, all of their Estate will pass to their spouse apart from their half of the property, which will go into a property Trust.
This allows their spouse to remain in the property and benefit from their half share, but means that if they need to go into care, the Local Authority cannot treat the half share of the property in Trust as part of the surviving spouse's Estate.
In addition, when the surviving spouse dies, the half of the property in Trust will be passed on as per the original wishes of the first spouse who died rather than the surviving spouse's Will.
Life Interest Trusts
A Life Interest Trust is very similar to the property Trust above except that, rather than just putting your share of the property into the Trust, you are placing your entire Estate in the Trust. In other words, all your cash and other assets would be included along with your property.
By setting up a Life Interest Trust in your Will, you can offer the income generated from the Trust's assets, as well as the right to live in any property held in the Trust. You can name the person of your choice and this person will be known as the 'Life Tenant'.
Life Interest Trusts are typically used when couples re-marry but want to provide for their children from a previous marriage. A Life Interest Trust allows each spouse to leave their surviving spouse the right to income from their Estate and a right to occupy the home for the rest of their life or until they marry again. When they die or re-marry, all the cash and property in the Trust passes down to their children from their first marriage. This type of Trust actively prevents what is sometimes called 'sideways dis-inheritance'. This can occur if surviving spouse, who inherits everything, writes a new Will and leaves everything to their own children and excludes the children of the first spouse, even though their wishes were to not disinherit their children from their first marriage.
A Discretionary Trust is extremely useful if you are not sure how you want to ultimately distribute your Estate or that decision will be directly influenced by other circumstances. By making a Discretionary Trust, you pass the decision of how and when the Trust will be distributed, over to the Trustees, who make the decision for you. When setting up the Trust in your Will, you will specify which assets should be included from your Estate and the names of potential beneficiaries, but you give power to your Trustees to decide how and when the Trust is going to be distributed and to whom.
This may sound a strange thing to do on the face of it, but there are many reasons why this may be a good idea. If one of your children has a problem with alcohol or with drugs, is very bad with money or has gambling problem, this would probably make you reluctant to leave them a significant amount of money. Whilst they may not be 'on the straight and narrow' now, this doesn't mean they won't be in the future and this type of Trust allows you to effectively 'defer' their rights to the assets until the Trustees feel it is appropriate. Normally, you would expect a Letter of Wishes to be prepared, addressed to the Trustees, giving them guidance over how you would like them to exercise their discretion and what factors you would like them to take into account.
Disabled Persons Trusts
As suggested by the name, Disabled Persons Trusts are designed for circumstances where you wish to leave some or all of your Estate to a beneficiary who is unable to manage the inheritance themselves. In these circumstances you can leave an amount to your Trustees to manage the Trust assets on behalf of and for the benefit of the disabled beneficiary during their lifetime. Upon the disabled beneficiary's death the Trustees can decide how the remainder of the Trust is to be distributed.
Using a Trust in a Will can be very effective and you can see that there are a number of options for you to consider. Each one has benefits or drawbacks depending on your circumstances and you should talk through your options with a specialist Wills Advisor.