Understanding Will Trusts

Wills and trusts are often considered separate, but have you ever heard of a Will trust? Will trusts can be a valuable tool for estate planning, protecting assets, and ensuring they are distributed according to the settlor’s wishes.

However, they can be complex, and it’s important to understand how they work and the benefits for you and your estate. This blog will provide an overview of will trusts and explore the key factors to consider when setting one up. Whether you’re a settlor looking to protect your assets or a beneficiary hoping to better understand your rights, this blog will provide valuable insights into the world of Will trusts. 

What Is a Will Trust?

A Will trust is a legal arrangement where assets are transferred into a trust upon the death of an individual, as specified in their Will. The assets are then managed by a trustee appointed by the person who created the trust (the settlor) in accordance with the terms of the trust. Unlike other trusts, which take effect when you are still alive, you establish a Will trust in your Will, which activates when you pass away. 

A Will trust can be established for various reasons, such as ensuring assets are protected and managed in a specific way for the benefit of beneficiaries, to minimise taxes, or to provide for individuals unable to manage their own financial affairs.

For example, you may create a Will trust to provide for your children or grandchildren after you pass away. The trust assets can be managed by a trustee until the beneficiaries reach a certain age or milestone, at which point they may receive the assets outright.

There are multiple types of Will trusts that you can establish, which depend on:

  • Who your beneficiaries are, and if they are legal minors
  • If you want to give trustees discretion over what each beneficiary receives, or if you want to leave specific instructions 
  • How complex your estate is and how your trust will affect other aspects of it

Will trusts can be complex legal arrangements, and it’s essential to seek professional advice from The Planning Bee to ensure that they are created and managed correctly.

Benefits of a Will Trust

There are many benefits to creating a Will trust, including:

  • Control – With a Will trust, you can specify exactly how your assets will be distributed and managed after your death. This allows you to maintain greater control over your assets and ensure that they are distributed according to your wishes.
  • Protection – This type of trust can protect the assets held within the trust. This can be particularly useful in situations where beneficiaries cannot manage their own financial affairs or where there are concerns about the potential for creditors or legal claims against the estate.
  • Privacy – Unlike a Will, which becomes a public document once it is probated, a Will trust can provide greater privacy for the settlor and their beneficiaries.
  • Tax savings – Depending on the specific circumstances, a Will trust can help to minimise taxes that would otherwise be payable on the estate by allowing for assets to be distributed in a tax-efficient manner.
  • Flexibility – A Will trust can be designed to be flexible, allowing for changes to be made as circumstances change over time. This can be particularly useful in situations where the needs of beneficiaries may change over time.

Will Trusts and Care

Couples commonly use Will trusts to manage how their jointly-owned property will be dealt with. If you own your home as tenants in common with your partner, you can leave your share of the home to the trust, which begins upon the first partner’s death.

If a Will trust is utilised for the family home and your partner passes away, you, as the surviving spouse, will maintain a ‘life interest’ in the property, which grants you the right to inhabit the house and receive profits from any sale proceeds if the property is sold. If you require care, the local authority may only evaluate your portion of the property value for payment purposes, while the portion owned by the trust is typically exempt. 

Consequently, this approach can safeguard your assets from care home costs. According to the government’s Charging for Residential Accommodation Guide, this arrangement will not be regarded as ‘deliberate deprivation,’ implying that you have intentionally separated your assets to evade high care-home expenses.

Will Trusts and Tax

The taxation of Will trusts is a complex area, and there are several key considerations to when establishing a trust. These include:

  • Capital gains tax – Trustees are subject to capital gains tax at a higher rate, with a tax rate of 20% on most assets and 28% on residential property. Additionally, trustees are only entitled to half the annual tax-free allowance of individuals. Any transfers of assets from the trust to a beneficiary may also incur capital gains tax.
  • Income tax – Beneficiaries of the trust are required to pay income tax on any income the trust generates. If beneficiaries do not have an automatic right to the trust’s income, the trustees may be subject to more income tax.

Given the complexity of the tax rules surrounding Will trusts, it is highly recommended to seek expert advice from an estate planning professional. They can assist in determining the most tax-efficient structure for the trust and navigate the various tax requirements and regulations.

With the proper guidance, Will trusts can provide peace of mind and security for years to come. They are an effective estate planning tool for individuals seeking greater control, protection, and flexibility over their assets. By establishing a Will trust, individuals can ensure that their assets are distributed in accordance with their wishes while also potentially minimising taxes, maintaining privacy, and protecting their assets from legal claims or creditors. 

Given the complexity of Will trusts and the legal and tax requirements involved, it’s vital to seek professional advice from The Planning Bee to ensure that the trust is structured properly and meets your specific needs. Contact our team today to find out more and book a free consultation.

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