Illustration of person signing will

Illustration of person signing willSetting up a trust is a way to give you control over what happens to your financial assets during your lifetime or when you die.  A will trust is a type of trust that is only created upon death. The trust is included in your will and allows you to pass assets to your family or loved ones – the beneficiaries – via the named trustees.

There are many potential scenarios when using a will trust could be appropriate, such as leaving assets or property to loved ones, or donating money to charitable causes.

A will trust differs from a normal will in that you are choosing to leave assets to your trustees to be distributed according to the terms of that trust and in conjunction with any corresponding guidance to your trustees rather than leaving assets outright to specific beneficiaries. This offers more protection for young or vulnerable beneficiaries and is also a flexible way of benefitting a class of individuals or charities.

Beneficiaries and trustees

The beneficiary does not have to be an individual, it can also be a group of people, a charity or a company. Trustees could be chosen from family members, friends or appointed legal professionals. Some people chose a combination of some or all of these.

The will trust allows you to decide what you would like to give to the beneficiaries and when i.e. upon attaining a certain age, or alternatively, you can give your trustees the flexibility to make this decision after your death. If you choose the latter option, known as a ‘discretionary will trust’, you can provide guidance to your trustees as to how and when you would like the named beneficiaries to receive a benefit from the trust and the particular circumstances they should take into account.

Role in estate planning

Will trusts can be an effective tool in your estate planning as they offer a way to minimise the impact of Inheritance Tax on your estate and allow your estate to maximise any available tax relief, such as inheritance tax business or agricultural relief.

Furthermore, by including a will trust, your assets can be managed and distributed in a timely manner, for example if any of the beneficiaries were experiencing marital or financial difficulties, their share could be retained in trust until such a time as it was appropriate to pass it to them.

Tax considerations

Inheritance Tax (IHT): Trusts are subject to IHT charges on distributions and each 10-year anniversary. The 10-year charge is based on the value of the assets in the trust at the time of the charge. The maximum charge would be 6% of the value of the assets over and above the available nil-rate band (currently up to £325,000).

Income tax: Discretionary trusts pay tax at the higher rates on income above £1,000 – 45% for interest and 38.1% on dividends. If a beneficiary receives an income payment from the trust, they may be able to reclaim some or all of the tax, depending on their own marginal rate of tax.

Capital Gains Tax (CGT): Trusts have a CGT annual allowance of £6,150 (2021/22) and pay CGT at a rate of 28% on residential property and 20% on other chargeable assets.

It is possible to ‘hold over’ gains when assets leave the trust, so that any gains are taxed at the beneficiaries’ marginal rates rather than the trust rate.

If you would like some personalised advice, please get in touch.

Rebecca Best

Senior Solicitor, Private Law

Rebecca has experience of dealing with a broad range of private client matters including Wills, Lasting Powers of Attorney, Court of Protection work, the administration of estates, tax and succession planning, and the administration of trusts.

Learn more about Rebecca Best