Trusts and Wills sound like entirely different things; however, there are many ways that you can incorporate trusts into your Will!
Wills vs Trusts
Wills and trusts are often discussed together, and it can be challenging to understand the differences between them.
A Will is a legal document that comes into force when you pass away. You can give instructions for your funeral, appoint guardians for children under 18, and outline where you want your assets to go and to whom. Your Will must be officially witnessed and signed to be valid.
A trust, on the other hand, is defined as a fiduciary relationship. When establishing a trust, you as the settlor will give your assets to a trustee, who will then hold them on behalf of your chosen beneficiaries. There are many types of trusts with different rules; in some cases, the trust’s settlor can also be a beneficiary.
Wills only come into effect after you pass away, but trusts can be created both in a Will or during your lifetime. Trusts can have different effects and start at different times depending on the type of trust and when it was established.
Passing away without a Will is called dying intestate and can lead to many complications that can cause problems in the future for your loved ones. Passing away without a trust will not come with the same issues, but if you do not use trusts to your advantage, you could be missing out on some incredible benefits.
Also known as a testamentary trust, this form of trust is created within your Will. You establish the conditions of the Will trust in your lifetime, but it only comes into effect when you pass away.
Will trusts are commonly used to establish a Protective Property Trust, which helps protect the family home against several scenarios. The benefits of a Protective Property Trust include:
- Avoiding sideways disinheritance – this can occur when one spouse passes away and the remaining spouse remarries. Children from the first marriage are at risk of being accidentally disinherited if the remaining spouse dies intestate or does not make provisions for them in their Will. A Will trust can help avoid this by ensuring your children receive your share of the family home while allowing your spouse to remain in the property until they pass away.
- Reducing care fees – care fees can be incredibly high, and many people resort to selling their homes to pay for them. With a protective property trust, you can avoid this issue. You and your partner must be tenants in common to establish this form of trust, each owning 50% of your property. That means you or your spouse will have the right to live in the house after the other passes away and if you need to pay for care, half of the property in the trust will not be counted towards care home fees.
Other forms of trusts that you can incorporate into your Will include:
- A discretionary Will trust – this form of trust is created to hold inheritance for your beneficiaries. You may choose to establish a discretionary Will trust if you are unsure exactly how you would like to distribute your estate or if you would like to protect the inheritance of a beneficiary facing bankruptcy or divorce. Your chosen trustees will have full power to decide how and when the assets in the trust will be used and by whom.
- Flexible life interest trust – a flexible life interest trust entitles a chosen beneficiary to the trust’s income for life, but they are often not entitled to receive any capital. After their death, the assets will pass onto other beneficiaries named in the trust deed. This trust is often used to provide for new partners while ensuring that children from an earlier marriage will still be provided for.
There are many other ways to include trusts within your Will. For more advice and options, arrange a free consultation with the legal experts at The Planning Bee.
Unlike Will trusts, lifetime trusts do not come into effect upon your death – instead, they are established immediately. The assets you place within this trust are protected for your beneficiaries against claims such as divorce or bankruptcy, and even after you pass away, the assets within are protected.
There are several types of lifetime trusts, including:
- Bare trust – a simple form of trust, bare trusts allow the settlor to place assets that the beneficiaries cannot access until they are 18.
- Settlor-interested trust – while not a specific form of trust, a settlor-interested trust is any trust in which the settlor or their spouse benefits from the assets of the trust. If the settlor is also a beneficiary, this would be classed as a settlor-interested trust.
- Vulnerable beneficiary trust – this form of trust is established for those who have a mental or physical disability or for beneficiaries under 18 who have lost a parent.
Lifetime trusts can give you more control over where your assets will go and save on Inheritance Tax, allowing you to pass on more of your estate to your beneficiaries.
Wills and trusts are very different, but you can combine the two in incredibly effective ways. Whether you want to reduce your Inheritance Tax, protect assets for your loved ones, or avoid the potential pitfalls of sideways disinheritance, there is a trust out there that is right for you.
The world of trusts is not just for the ultra-wealthy. That said, there are many options to choose from, and it can be quite complex. Contact The Planning Bee today to learn how you can use them to your advantage.