How much time would you say that you spend planning a holiday, researching what car to buy, or even searching for a place to have a romantic dinner for two? How does that time compare with the amount of time you spend on estate planning – deciding who will inherit your assets after you have passed away, or looking at ways of mitigating Inheritance Tax? There is no fun in doing that of course, in contrast to thinking about booking a trip or checking out restaurant reviews, but without estate planning you cannot choose who inherits everything that you worked so hard for, and you may end up paying significantly more in tax than you need to.
It is a myth that estate planning is only for the rich. Without it, settling your affairs after you have died could have a long-lasting – and possibly costly – impact on the loved ones you leave behind, even without a stately home, a Tiffany lamp or a Renoir.
Making a Will is probably the first and most important place to start protecting your assets for those you leave behind. Dealing with your Will is all too easy to put off and many people never get around to it. But in most instances, creating a Will is easy to do and takes relatively little time.
There are a variety of reasons why it may be advantageous to include a trust in your Will. The key benefit is that it offers added protection for those you leave behind. Some of the other reasons include:
- ensuring children from a previous relationship inherit even if you have a new spouse/partner
- protecting your estate against potential future care fees (although this needs to be considered very carefully as there are strict anti-avoidance rules)
- providing for a vulnerable or disabled person in a protected way
There are different types of Will trust which can be used, depending on your particular circumstances. Two of the most common types are a “life interest trust” and a “discretionary trust”.
In a life interest trust, usually one individual (although occasionally there can be more than one) is granted an absolute right to receive the income from the assets in your estate. The income beneficiary is normally referred to as the “life tenant”, although the word “tenant” in this context has nothing to do with renting.
The right to income also confers on the life tenant an absolute right of occupation of any property belonging to the trust. This means that the life tenant has an automatic right to live rent free in the property for the rest of his or her life, or until the life interest comes to an end for another reason. At the end of the life interest, the trust assets pass outright to the beneficiaries named in the Will. Those beneficiaries are referred to as the “remaindermen”.
A life interest trust in a Will is particularly suitable where you want your share of the family home to pass to your children from a previous marriage or relationship, whilst protecting the second spouse’s occupation in the home.
It is important to consider how the trustees of the life interest trust will pay for repairs, maintenance and insurance of the property whilst the life interest is in existence, as the life tenant will only be responsible for the usual outgoings (utility bills, council tax etc). It may be worth establishing a cash “sinking fund” to cover such expenses.
In addition, where a second spouse is granted a life interest in a property, it will be important for the children from the previous relationship to appreciate that they will not inherit the property until the life interest has come to an end.
The other common type of Will trust is a discretionary trust. Discretionary trusts are so called because no beneficiary has a fixed entitlement and the trustees have complete discretion to decide what benefits (if any) should be given to the beneficiaries, so it is extremely flexible. The class of possible beneficiaries can be as wide or narrow as the person making the Will chooses, and not all of the beneficiaries need to be in existence when the Will is signed. For example, a class of beneficiaries could refer to the children and future descendants of the person making the Will. The important point to remember is that mere inclusion in the class of beneficiaries does not confer any right to receive any benefit from the Will trust.
Discretionary trusts are particularly suitable where you want to give your trustees the maximum flexibility to make decisions as and when circumstances arise in the future. Discretionary trusts are useful in protecting beneficiaries who are minors, vulnerable or disabled, bankrupt, or going through a divorce, for example.
With a Will trust, individuals can be named as trustees and it is their role to administer the trust in line with your wishes, ensuring that the beneficiaries are provided for. Usually, at least two trustees are appointed and there is no legal reason why you cannot appoint the same people both as executors and as trustees in your Will, should you wish to do so.
Acting as a trustee carries a great deal of responsibility. As such, it is wise to take care before appointing someone and be sure to talk to them about it first, making clear what the role would entail and what your wishes are.
Get in Touch
If you would like any further information about including a trust over a property in your Will, please contact Jane Whitfield at Barrett & Co at [email protected] or on 0118 958 9711.