Will Trusts & Lifetime Trusts | Redwood Financial Services

Will Trusts & Lifetime Trusts

Will and Trust Services

An essential part of protecting your assets for those you leave behind is making a Will. If you have dependants, you could set out what your wishes are for them in the event of your death, including naming those you wish to be their guardian.

However, a basic Will cannot do much more than detail your wishes. It will not protect you against factors that can erode the value of your Estate, like Inheritance Tax, Long-Term-Care Fees, Divorce and Relationship Breakdowns.

The good news is that you can take action to protect your legacy in a legal and tax-efficient way, using the law as it was intended to be used by HMRC. The solution is Protective Wills which carve the right types of Trusts through them, bespoke to achieving your Estate Planning goals.

With so many different types of Trust available, it can be confusing to know which is the right Trust for you, and why. The benefits of Trusts may be unclear to many, especially as the Government is always reviewing the Inheritance Tax structure, but Inheritance Tax mitigation is only one element of what a Trust can do for you.

What is the difference between a Will Trust and a Lifetime Trust?

A Will Trust or ‘Testamentary Trust’ is only created upon death. You set up the Trust as part of your Will in order to pass assets on to your family or loved ones and it becomes active on the day you die.

Lifetime Trusts are different from Will Trusts because they are established straight away and not upon death. Lifetime Trusts can be used to make gifts while you are still alive, and depending on the type of Trust used, you can continue to benefit from your assets whilst you are alive, but effectively keep them in the ‘safety deposit box’ of the Trust.

What types of Trusts are there?

Discretionary Trust (or Accumulation Trust)

This Trust gives the trustees discretion to decide which of the beneficiaries to pass trust assets on to, how much they will receive and when they will receive it. This protects a beneficiary’s money if they are financially unstable for any reason and it means money does not have to pass to a beneficiary who has become wealthy and no longer needs the inheritance.

Property Trust

A property Trust helps to protect property from being used to pay for long-term care fees. For this kind of Trust to work, you and your partner or spouse must own the family home in joint names as tenants in common. 

Each partner sets up a Will with each of you leaving your share of the property in the property trust. When one of you passes away, that share of the property passes into the trust. Then if the survivor needs long-term care in the future, only their share is used by the local authority for a means-test when calculating contributory fees, because the other share is protected in the property trust. The protected share will eventually pass to the Will beneficiaries.

Life Interest Trust

A life interest trust allows you to specify who will have the rights to your property after you die. It is very similar to a property trust in that it offers protection from care fees. The main difference is that a life interest trust protects all your assets and not just your property. It also enables you to choose somebody to benefit from the trust whilst they are alive and at the same time to protect the underlying capital for other beneficiaries after their death.

Charitable Trust

This is a trust in which the beneficiary is also a charitable trust. Most large charities in this country are ‘charitable trusts.’ 

Setting up a charitable trust gives you the satisfaction that your assets will be used constructively and leaves a lasting memorial of your life. Charitable trusts are free of Inheritance Tax and Capital Gains Tax because they are for the public good.

How can Trusts help you?

Dealing with your Will is all too easy to put off. Fears of being morbid or feeling like there is not much to leave behind, mean all too often people fail to make a Will. However, if you pass away without a Will, your Estate will be left Intestate, meaning your assets will be distributed in a way defined by law – a way which might not be in line with your wishes.

In most instances, creating a Will is easy to do and takes relatively little time. You can also choose to include a Trust in your Will, which provides added asset protection for those you leave behind.

Through a Will Trust you can:

  • protect your estate against potential future care fees
  • leave assets to a vulnerable or disabled person
  • ensure children from a previous relationship inherit even if you have a new spouse/partner
  • mitigate Inheritance Tax liabilities
  • Protect your beneficiaries from divorce and relationship breakdowns

Is it better to have a Will or a Trust?

You may think the solution is to just name your beneficiaries in your Will and not bother with setting up a Trust. In reality, there are a number of reasons why Will Trusts may be best for your circumstances.

Tax Planning

This is probably the most well-known benefit. For Inheritance Tax purposes, gifts given to a Trust can reduce the tax to which your Estate could be subject, providing you live for 7 years after making the gift. Trusts can also be used to direct an income to beneficiaries. That income (subject to certain conditions) will then become a part of that individual’s taxable Estate instead of yours.

Longevity

A Trust can be used to protect your assets for your surviving spouse and/or any children. Trusts can last for up to 125 years, and this is a long time to be certain that your future generations are being looked after. For example, if you want to make sure that in 20 years’ time your grandchildren will have money for a deposit on a house, you can. You can have peace of mind knowing that your legacy is not only being passed down to future generations but that it is also happening at the right time.

Control

As a Settler of a Trust, you can have varying levels of control.  If you were to simply gift someone a sum of money, you would have no say over how it was used and when. However, if money is left through a Trust, the trustees can decide how and when the beneficiaries can access it. This allows the benefits to remain in the Trust rather than being absolutely distributed. You could also increase the amount of control over these decisions by also making yourself a Trustee when the trust is initially created.

Protection

This is a major advantage as the assets are protected from third-party claims. For example, if one of the beneficiaries is going through a Divorce or Bankruptcy, no claim can be made over any of the assets held in that Trust. (This is a major advantage if you have any concerns over who your children have tied the knot with.)

Other often-overlooked benefits of Trusts include increased levels of confidentiality and speed of access to benefits. Upon death, a person’s Will can become accessible to any member of the public who is willing to pay to view it on the online Probate Registry.

The contents of a Trust, however, will never be shared with the public. As well as increasing privacy, having assets in a Trust will also reduce the waiting time for beneficiaries to receive their benefits. For example, if your Pension or any other life policies were placed into a Trust, it would not be necessary to wait for Probate to be granted before using those assets to pay any Inheritance Tax liabilities or pass to your beneficiaries.

What is a Trust and how do Trusts work in Wills?

Think of a Trust as a type of virtual safety deposit box, there for you to put assets into for safekeeping, that only you and your nominated trustees can access.

When your assets are distributed from your Trust to your beneficiaries, this is done on the basis of a loan, so they are receiving a loan from the Trust, rather than a gift.

It is that very subtle difference that has the immensely powerful benefit of removing the value of that asset from your beneficiaries Estate. A loan is an outstanding debt against your estate when you die and must be settled before any Inheritance Tax is paid.

Certain types of Trust can be made active while you are still alive, for example, a Property Protection Trust can be used to protect your main residence against Care Fees Assessment, should you need care in the future. Essentially, ownership of your main residence passes from you to your Trust.

So, if that time comes for you to go into care, the local authority cannot count the value of your main residence into your estate value for Care Fee Assessment. This means the local authority will have to pay their fair share of your Care Fees, leaving your appointed trustees to use the wealth in your Trust to pay for things like top fees to ensure you have the very best care, or perhaps the little luxuries in life you might otherwise have had to do without.

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Jasmine Lambert - Redwood Financial
Jasmine Lambert
Jasmine was awarded the British Young Practitioner of the Year in 2018. She is a qualified Financial Planner and full member of Society of Will Writers.
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