Creating a trust in your Will can help your Will adapt to the circumstances that may arise at or after your passing, note how and when money should be released to your beneficiaries and protect your assets. These benefits may be why Trust Wills are becoming ever more popular.
What are Trust Wills?
Trust Wills put all or some of your assets on a trust which will only arise on your death. This means that, unlike in a trust created during your life, there are no restrictions on your use of your property, and the trust structure will only arise on your passing.
There are a large variety of trust structures that may be included in a Will, and I set out three of the most popular structures below.
Discretionary Trusts
In essence, a discretionary trust is a piggy bank into which assets are placed and which are looked after by your trustees on behalf of a pool of beneficiaries chosen by you. In this structure, your chosen trustees are responsible for overseeing and caring for the trust assets as well as having complete discretion to decide who from your chosen pool of beneficiaries should benefit from your trust and how. The key thing with a discretionary trust is that none of the beneficiaries has a right to receive assets from it, so control remains with your trustees.
Incorporating this form of trust can make your Will very flexible and adaptable. However, this flexibility also means that your trustees will have complete discretion regarding how your assets are distributed. We therefore recommend placing a Memorandum of Wishes with such a Trust Will, setting out how you would like your trustees to exercise their discretion.
A 'Memorandum of Wishes' is a letter to your trustees setting out when, and who you would like to benefit from it. For example, allow you to stipulate that you would like income to be released to your grandchildren to help pay for their school and university fees if this is the path they choose to take. You could also ask your trustees only to release money to particular beneficiaries if your assets are worth over a certain amount at your death or hold back on releasing funds to a beneficiary going through divorce proceedings.
As you can see, the great flexibility this structure gives to your trustees allows you to leave very detailed and extensive wishes of the circumstances in which you may want the trust to pay out capital and or income. Therefore discretionary trusts can be highly effective in ensuring that your assets are administered for the benefit of your beneficiaries in the way you envisage.
It is also important to remember that these are only wishes and are not legally binding. Therefore, due to this great amount of discretion, it is important to appoint reliable trustees who will follow your requests.
Another point to consider with a discretionary trust is that it is a taxable entity and, therefore, may attract a greater tax burden than the other options that I have listed below. However, any discussion of these implications is beyond the scope of this insight.
Classic Life Interest Trust
A classic life interest trust allows the testator (the person making the Will) to allow a certain person to have the right to the income of assets during their lifetime. For example, the life tenant (as the person would be known) would have the right to live in any property forming part of the trust until they die and then the trust assets would pass to others named by the testator.
This is a popular choice among testators who would like their partner to be able to live in or receive rent from a property, or an investment portfolio, until the partner dies but want the capital or value of the property to ultimately pass to a specific beneficiary, such as their children. This stops the surviving partner from disposing of the property and spending the sale proceeds, or leaving the property to a new partner.
Unlike the discretionary trust above, the life tenant would be the one to have to give up their right to receive income, if they wanted to dissolve the trust. Therefore, if the life tenant loses capacity, it would be difficult for the trust to be dissolved and capital accessed for the benefit of the remaindermen.
Terminable Life Interest Trust
A terminable life interest trust is similar to the classic life interest trust above. The starting point is that the life tenant would receive the trust's income, and the remaindermen would receive the capital on the life tenant's passing.
However, a terminable life interest trust offers a little more flexibility and is, therefore, a more complex trust structure. Under a terminable life interest trust, your trustees would have complete discretion to bring the life tenant's interest in the trust assets to an end or change that interest before the life tenant's death.
The trustees can choose to do this by releasing the trust assets to other beneficiaries or by placing those assets on another form of trust. Your trustees will also have the power to decide what shares of the trust assets should be divided between the beneficiaries.
Terminable life interest trusts are usually also accompanied by a Memorandum of Wishes, stating when and how you would like assets to be released and when (if at all) you would like the trustees to end or reduce the life tenant's income from the trust. However, the Memorandum of Wishes is, like it is with discretionary trusts, not legally binding.
In practical terms, the terminable life interest trust shares many of the benefits of the discretionary trust above. For example, if you put a rental property in the trust and your life tenant was your partner and the other beneficiaries your children, you could ask your trustees to pass all income of the property to your children if your partner has a sufficient amount of money (adjusted for inflation) or re-marries. You could also ask your trustees to release additional monies if your partner has medical expenses that your partner cannot pay out of their own pocket. You could also ask your trustees to reduce the amount of money released to your partner once your children no longer live with them.
Therefore, the terminable life interest trust is considerably more flexible than the classic life interest trust and, therefore, sits somewhere between the classic and discretionary trusts outlined above.
Of course, the life interest forms of trust have their own regime for tax purposes and so this may be something for you to consider.
Conclusion
As you will see from this short overview, putting some of your assets on trust in your Will can provide a lot of flexibility and control over how your assets are dealt with after you pass. It is always vital, though, that you receive specific advice on the pros and cons of these forms for you and the tax treatment of them.
If you want to discuss any of the points raised above, or if you need any help with succession planning advice, contact our legal experts today.
