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10 Mar 20
Will Trusts – What are they and how do they work?
What is the difference between a Will and a Trust?
A Will is a legal document that contains information about how an individual (known as a testator) wants their estate to be distributed after their death.
A Trust is a legal arrangement through which one person or institution (known as a trustee) holds legal title to property for another institution (known as a beneficiary).
The main difference between a Will and a Trust are that the instructions within a Will are only actioned upon death. Whereas, a Trust begins from the date it is created.
What is a Will Trust?
A Will Trust (sometimes referred to as a testamentary trust) is created within a Will to allow someone to benefit from an asset even though they are not the legal owner. It allows an individual to protect property that they hope to pass on to their family. It can also help to avoid sideways disinheritance.
What is sideways disinheritance?
Sideways disinheritance can occur when the first partner dies and there are children within the marriage. These children might reasonably expect to inherit some of the family estate in due course.
However, if the surviving partner remarries and fails to make provision for their children in a new Will, there’s a risk that everything will go to their new spouse. This means the inheritance will completely bypass the children who were intended to inherit. It is in situations like this, where a Will Trust is of the utmost importance.
Who can use a Will Trust and why?
Will Trusts are primarily used by married couples and civil partners. They are set up in conjunction with splitting ownership of the family home, so each partner owns 50% of the house. This is also known as ‘tenants in common’. Rather than leaving the house to each other, they leave it to a Trust, specifically, a Will Trust. This Trust then comes into force on the death of the first partner.
How is a will trust created?
A Will Trust is created when the individual (testator) leaves instructions in their will for part of their estate to be placed in Trust. The Will sets out the detailed terms of the trust and only commences after the testator has died.
When are Will Trusts used?
- They can be used to provide for a husband or wife after death, while protecting the interests of any children. This can be particularly important for families where there are children from previous marriages
- They are used to protect the inheritance of young children until they are old enough to take responsibility for their own affairs
- If you are an unmarried couple with significant estates, you can use a trust to help reduce your inheritance tax liability
- Will Trusts can be used if you are a couple and joint owners of your property
- They can be used to provide for vulnerable relatives who are unlikely to be able to look after their own affairs
- A Will Trust can also be used to help succession planning in a family business.
Will Trusts and long-term care *
Will Trusts can also be useful when one partner dies and the remaining spouse needs long term care. If you use a Will Trust and your partner dies, you as the surviving spouse retain a right to live in the house. If you need to pay for care, only your share is assessed by the local authority.
The part owned by the trust should not be counted. In this way it’s protected from care home costs. Government guidelines for local authorities (Charging for Residential Accommodation Guide) suggest that this arrangement would not be contested as ‘deliberate deprivation’. Therefore, you will not be considered to have deliberately split your assets to avoid paying high care-home fees.
To meet the requirements of this guidance, the severing of the tenancy and the setting up of the Trust should be done in good time and when full time care is not on the horizon.
Will Trusts and disabled beneficiaries
Will Trusts can also be used if you have disabled beneficiaries. If you leave money to a disabled person directly, in the form of a gift in your will, it can affect any means-tested benefits they may be entitled to.
Additionally, if your loved one is vulnerable and you leave them substantial assets, you may leave them at risk of being taken advantage of financially. If they have any capacity issues, then they may have difficulty managing money and be unable to operate a bank account.
By using a Trust in your Will, this can enable you to look after the disabled beneficiary in the future and overcome these issues.
Do you think a Will Trust is for you?
For a no obligation, confidential discussion with one of our Legal Intermediaries to see if setting up a Will Trust is appropriate for you, call 01257 260011.
*Based on our understanding of current legislation and the CRAG guidance.