What is a Will Trust?

A life interest trust ensures a surviving partner's income while protecting any beneficiaries' assets.

It gives a named individual (known as a “life tenant”) the right to receive income from the trust during their lifetime. This individual is typically a surviving spouse or partner. The trust also gives this individual the right to live on the deceased’s property.

As part of the trust, the assets are held for the ultimate beneficiaries. These are the individuals who receive the assets after the death of the will writer (known as a testator). This is usually children or grandchildren.

A discretionary trust means that assets are held in a trust incorporated into a will. The person creating the will can decide who the potential beneficiaries of the trust will be. This can include people who have not been born yet, such as future grandchildren.

Upon the death of the testator, the appointed trustees will decide who becomes beneficiaries of these assets. The trustees will manage the estate and decide when and how these beneficiaries will receive assets.

This type of trust is limited to situations where the primary beneficiary of the trust is deemed to be “vulnerable”. This can either mean a person who is mentally or physically disabled or someone under 18 whose parent has died.

A vulnerable beneficiary trust operates similarly to a discretionary trust. It gives trustees discretion to decide what should be distributed to beneficiaries and when this will happen.

A bare trust is the simplest type of trust. It grants the beneficiary the absolute right to capital, assets, and income within the trust. This is provided they are 18 or over in England, Wales and Northern Ireland. In Scotland, an individual can benefit from the trust at 16.

Trustees will look after any assets until the beneficiary is old enough to receive them. Parents or grandparents commonly use these trusts to transfer assets to children and grandchildren.

Protection of assets for beneficiaries is often cited as one of the key benefits of a trust. They can secure assets for vulnerable or financially inexperienced beneficiaries. Trust wills can also shield assets from creditors and possible future care fees.

Certain trusts, such as the life interest trust, can provide flexibility. This allows you to plan for future generations, protecting assets for children and future grandchildren Be aware that some trusts are not as flexible, such as bare trusts.

Inheritance Tax (IHT) is payable on estates worth over £325,000. Anything above that threshold is taxed at 40%.

If an asset is put into a trust, it can be exempt from valuations for IHT purposes as it is no longer part of your estate. This is providing you live for at least 7 years after placing the asset into a trust.

According to the Government, most trusts do not pay Income Tax on any income up to a tax-free amount. This is normally £500. Tax is due on the full amount if the income is more than the tax-free amount.

Different types of trust income have different rates of Income Tax. Each type of trust is taxed differently. Additionally, trustees do not qualify for the dividend allowance.

Many people set up trusts when creating their will. You can also incorporate trusts into wills during estate planning.

There may be a period of administration after death. This is between the death of the person who made the trust and when the trust is activated. This can be a matter of months but in the case of complex wills and estates, it could be years.

Before setting up a trust, you must evaluate the estate's complexity and your family structure. You should consider your goals and plans, for example, the protection of assets for beneficiaries or tax efficiency.

Consulting a solicitor to draft trust terms is essential as they can provide legal advice and explain the process.

When it comes to selecting your trustees, it is paramount you choose reliable individuals who you trust implicitly. You should notify the individuals you wish to make your trustees and explain the responsibilities. This allows them to notify you if they do not wish to act as trustees and you can choose another person.

Avoid unnecessary complexity by tailoring the trust to specific needs. Seeking the advice and expertise of a professional will writer is essential to keeping the process streamlined.

You must appoint knowledgeable, trustworthy individuals to act as your trustees. You should be sure they are willing and able to carry out the role in a professional manner.

Regularly review and update the trust during your lifetime to reflect changing circumstances. This can include a change of address, loss or gain of assets, marriage and divorce or the birth of children and grandchildren.