What is a will trust? A will trust – also known as a testamentary trust – is created within your will to allow you to protect property you hope to pass on to your family. Trusts are legal entities that allow someone to benefit from an asset without being the legal owner. You create the trust and appoint a person to manage it – the ‘trustee’. The trustee manages the trust on behalf of the ‘beneficiaries’ – those who receive the income of the trust. Establishing trusts can give you an element of control over assets you wouldn’t have if you gave them away outright..
There are two main types of trust that you might choose to set up: a will trust, created upon your death, or a lifetime trust, which you establish during your lifetime. We explain the pros and cons of both.
Leaving property in a will trust Unlike a lifetime trust, a will trust is only created once you pass away. You set up the conditions of the trust in your will and it activates upon your death. Will trusts are mainly used by couples to split ownership of the family home if they own it as ‘tenants in common’. Rather than leaving their share to each other, they each leave it to a trust, which comes into being on the death of the first partner. Until recently, will trusts were a common way of saving on inheritance tax (IHT). A couple potentially liable for IHT could split their estate into halves, both below the nil-rate band. However, since 2007 married couples and civil partners have been able to transfer unused IHT allowance to one another. As such, most couples no longer need to make this type of trust for inheritance tax purposes, though it may be used to ring-fence the deceased spouse’s share from care home assessments. Find out more: inheritance tax on property Will trusts and 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. The part-owned by the trust is not counted. In this way, it’s protected from care home costs. Government rules (Charging for Residential Accommodation Guide) suggest that this arrangement will not be contested as ‘deliberate deprivation’, meaning that you have deliberately split your assets to avoid paying high care-home fees. Find out more: how to avoid inheritance tax – this guide explores a range of ways you can reduce the amount of tax due on the transfer of your estate. Will trusts and inheritance Another reason for setting up a will trust is to avoid ‘sideways disinheritance’. This occurs when the first partner dies, leaving children from the marriage who might reasonably expect to inherit some of the family estate in due course. 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 instead. To avoid this situation, you could set up a life interest trust in your Will, which leaves your share of the family home to your children, while allowing your spouse to carry on enjoying the right to live the property. You should seek legal advice before pursuing this option.
Read more: https://www.which.co.uk/money/wills-and-probate/passing-on-your-money/will-trusts-and-lifetime-trusts-aqmf66w4nu5w – Which?