Disadvantages of Will Trusts
This blog explains why everybody should have their Wills drawn up by a professional. It will also cover why those people with higher levels of assets should consider having Trusts placed into their Wills. However, there is an inherent problem with Will Trusts that this blog will explain so that you can better understand the alternatives.
Why set up a Will Trust in the first place?
Some people are faced with situations whereby they want to set up a Trust for perhaps a disabled child, or person in care. Or maybe they have children from previous marriages that they want to leave assets to meaning that they may not want their assets to be distributed evenly. Some people may want a spouse to live in a property, which they own, but want to pass that property on entirely to their own children when that new spouse dies.
Another reason for setting up a Will Trust centres around wanting to make sure that if you die before your children are old enough to look after money, that they don't get access to too much money in the early years and up to the age of around 25. A normal Will wouldn’t allow you to do that.
There are also some circumstances where sometimes people can't be trusted to look after money. As an example, if a client had a son or daughter who had a problem with alcohol and therefore didn’t want them to be a trustee. In this instance, we could provide a professional trustee, and they made sure that the assets and income were distributed to them as required as opposed to having access to it to any time.
Disadvantages of Will Trusts
There are, however, some disadvantages with Will Trusts, and this is centres mainly around the complex area of tax on Trusts and the legislation surrounding Trusts.
You can set up any number of Trusts that you like, but if they are not settled, in other words, something doesn't go into the Trust, then they don't actually exist. So, whilst you can set up a Trust, until the settlement occurs, no Trust exists.
If you depend upon a Will Trust, all of the assets fall into one or a number of Trusts on your death. It is important to realise in this case that the tax office treats those as one Trust, meaning that certain tax implications arise. This means that if the value of all of those Trusts together exceeds the Nil Rate Band allowance (which at the moment is £325,000) at the 10 year anniversary, there's something called a periodic charge applied. At the moment this is charge is 6% and is applied to the excess value over the Nil Rate Band at the time. This is applied at every 10th anniversary.
For people leaving large estates, that is a problem because it can create the 6% tax charge at every 10-year anniversary potentially for up to 50 years. This is because the Trust will last, not only through to your children but also to your grandchildren.
Will Trusts are not necessarily the most sensible route to use for people with larger estates, because they're only actually put into place on death. Therefore, for most people, and for our clients who have assets in excess of £1 million, we would look to set up a Lifetime Trust.
In this instance, rather than put a Trust into the Will, we would set up the Trusts during lifetime. The Trusts are written alongside the Will because you would want the same lawyers to write the Wills and the Trusts, so that is no differentiation. This also avoids a situation arising where one firm of lawyers blames another if something goes wrong.
The Wills and Trusts are written together with the Wills instructing that the money goes to the Trust. As the Trust is set up during lifetime, we place the settlement as soon as the Trust is set up. This can be as low as £10. We can actually Sellotape a physical £10 note to the Trust document signifying that the Trust exists and can be registered with the HMRC.
One of the benefits of setting up this type of Trust is that you can set up a Trust on one day and then another the following day. This means you can have different Trusts for your separate children so that eventually when your assets fall into them, whether gifted during lifetime or on death, each one of your children could control their own money. This also allows each child much more flexibility as one may want to leave money in Trust, and another may want to extract it. Therefore, one Trust per child, and sometimes a Trust for grandchildren, is a sensible route.
Lifetime Trust – Gifting money during lifetime
One of the other benefits of a Lifetime Trust is that you can gift money during lifetime. For example, you may want to give your children some money to buy a house. In this instance, you would place for example £50,000 into the Trust, and that money is then loaned out to your children immediately. As that money has come to them as a loan from the Trust, should they ever find themselves in a situation such as a divorce, that loan can be recalled to the Trust at any time. This means that the money is safeguarded within the Trust.
You can find more on this in our blog - Is Estate Planning more important than inheritance tax Planning
Another benefit is that you can use your NIL Rate Band to gift money into Trust. This means that you could put £325,000 into the Trust, wait seven years and then gift another £325,000 into the same Trust. This also helps reduce the estate for inheritance tax purposes.
Lifetime Trust – Protection from legislation
As the Trust exists (because the settlement has been made), this means that it is potentially much better protected from legislation in the future. It's very rare for the HMRC to apply any new legislation retrospectively. This means that as your Trust will have already been set up, it is unlikely that any changes in legislation will affect them.
This wouldn’t apply in the case of a Will Trust because the settlement is not placed until death and therefore, the Trust doesn't actually exist meaning that any changes to Trust legislation would apply. Setting up the Trust early in this way means that you know what the costs are upfront and you can determine that it's good value for money. It also gives you peace of mind to know that these matters are taken care of so that when you die, your children will simply just need to act as the beneficiaries.
Will Trusts are worthwhile having for most people as even if you're only going to leave £100,000 to your children, protecting those assets is a worth while endeavour. However, we believe that Lifetime Trusts have more substantial advantages, especially for those people with higher value estates:
- You can set up a number of Trusts– one for each child and grandchildren
- The settlement can be as little as £10
- You know the cost when setting them up
- You can use them more than once
- Less likely to be changed by future legislation
- Less administration issues on eventual death
Like all matters related to Estate Planning and inheritance tax, experienced advice is essential.
Call us if you require any help.