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In last month’s blog post we looked at wills and why it’s important to use a solicitor to help you make yours. To get a finished product that you can be confident meets your individual requirements, you need the services of a professional who will assess the bigger picture before advising you on the best solution to suit your circumstances.

One of the things a solicitor can advise you on is whether you should set up a trust as part of your will. This month, we’ll be looking more closely at the advantages of trusts and how they work.

The simple option when drawing up your will is to leave your estate outright to your surviving spouse, children, or other chosen beneficiaries.

The simple option when drawing up your will is to leave your estate outright to your surviving spouse, children, or other chosen beneficiaries. Sometimes, however – for example, if your circumstances are more complex or you have particular wishes over the distribution of your estate – this approach might not be enough.

Choosing to put your assets into a trust for your beneficiaries can provide the right structure to ensure they receive a meaningful and lasting benefit from their inheritance. It also offers a number of advantages including added protection of your assets, greater flexibility when distributing your estate, and inheritance tax savings for future generations. The following case study shows how:

Case Study

John, aged 70, is a retired entrepreneur and wants to make a will. His wife died five years ago but he has three adult children:

Marcus – a successful businessman who has two young children of his own.

Amanda – a teacher who is going through a difficult divorce.

Peter – who was made redundant last year and is currently experiencing financial difficulties.

John has assets of approximately £3m and has certain wishes regarding the passing on of his assets. His main priorities when making his will are:

  • to ensure that his children receive a lasting benefit from his estate when he dies;
  • that a substantial part of his estate is protected for his grandchildren;
  • that he is able to fund his grandchildren’s private education.

With the advice of his solicitor, John makes a will which leaves his entire estate in a discretionary trust for his children and grandchildren. He appoints his two eldest children, Marcus and Amanda, as the trustees of this discretionary trust – but not Peter due to his current financial position. John prepares a letter of wishes to sit alongside his will so that his trustees know how and when he would like each of his beneficiaries to benefit.

John sets out in his letter of wishes that he would like each of his grandchildren to receive a sum of £50,000 at a time when they are sufficiently financially mature (which John estimates will be at the age of 25). He also requests that a sum of £500,000 in the trust should be ring-fenced for his grandchildren’s private education. He then wants the remainder of his estate to be divided equally between Marcus, Amanda and Peter.

With a discretionary trust, income and capital are distributed at the total discretion of the trustees, which makes it particularly important to choose the right people for the job. In John’s case, two family members have been appointed but it is common to also include a professional such as a solicitor as one of the trustees. In our example, while John doesn’t think his chosen trustees (Marcus and Amanda) would act against his wishes, he is comforted to learn that they are under a legal duty to act in the best interests of the beneficiaries of the trust.

As well as allowing John to clearly stipulate how he would like his assets to be distributed when he dies, the trust offers additional advantages:

Protection of Assets

By using a discretionary trust in his will – rather than leaving outright gifts to Marcus, Amanda and Peter – John is able to protect Amanda and Peter’s allotted share of the trust from their respective personal problems. If John were to die while Amanda was still going through her divorce, or Peter was still struggling with financial difficulties, their allocated share of John’s assets could be vulnerable; Amanda’s may end up becoming part of the divorce settlement, or Peter’s could be diverted to paying off creditors.

Retaining their portions within the trust structure means that their inheritance is better protected. Their share could then be distributed to them once their circumstances were more settled. If they required financial assistance in the interim, funds could be made available to them in a protected way, for example, by way of loans from the trust.

Flexibility

A discretionary trust also offers more flexibility. For example, John has estimated that his grandchildren will be financially mature by the time they are 25, and that this would be the point at which they should receive their £50,000 inheritance. However, if any of John’s grandchildren need access to funds before they are 25 – to fund university fees for instance – the trust funds can be distributed to them early if the trustees think it is sensible to do so.

This discretion and flexibility works both ways. The trustees may think that a particular grandchild isn’t financially mature enough by the age of 25 and may choose to postpone the distribution of the assets to them. Alternatively, the grandchild may suffer from a disability, or be in the middle of marital or financial difficulties of their own. In any of these instances, or similar, the funds can be retained in trust until the trustees are happy it is the right time to distribute them.

Inheritance Tax Savings for Future Generations

Although including a trust in John’s will does not save inheritance tax when he dies, the value of the trust will not form part of his children’s estates when they die. Only the assets that have been transferred out of the trust and into the direct ownership of Marcus, Amanda and Peter will form part of their estates for Inheritance Tax purposes. Transferring assets from the trust only as and when they are needed could therefore potentially save up to 40% Inheritance Tax when John’s children die, so that ultimately more of John’s estate can pass down to his grandchildren.

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Using a trust in your will has many benefits and can give you the protection, flexibility, tax efficiency and greater peace of mind that a basic will package is unlikely to be able to offer. Ultimately, it can provide the most effective means of ensuring that the right people benefit from your estate in the most appropriate way possible. If you would like advice on setting up a trust as part of your will, or on any other personal legal matters, please get in touch.

The content of this article is for information only and is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Progeny Private Law Ltd accepts no responsibility for the content of any third-party website to which this article refers.

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