More clients than ever are seeing the benefits of creating a trust under the terms of their wills to protect their wealth and their loved ones, given the perennial static level of the nil rate band and the continuous rise in property prices.
A will trust effectively ring-fences the trust asset from the rest of the estate for inheritance tax purposes. The end goal will vary significantly depending on the client’s circumstances, for instance, to free up more cash for their loved ones, postpone the beneficial entitlement until an individual is mature, to fund further education or provide a life interest in property for a beneficiary.
It’s therefore vital for practitioners to consider the types of will trust available and how they can be most effectively utilised to mitigate the potential tax implications and achieve the client’s aims.
A robust trust will be administered by careful management. This means the client must be urged to choose trustees wisely, making sure they are trustworthy and reliable. Solicitors will naturally signpost clients to the benefits to be had from appointing professional executors and trustees.
The most appropriate form of trust will for a given client will depend on the client’s unique set of circumstances and how complex the estate as a whole may be. Where the client, for instance, has foreign assets, the tax and succession rules in other jurisdictions will need to be considered.
Ultimately, practitioners will need to choose the form of will trust that will best suit the client’s overall purposes.
- Bare Trusts – After the testator’s death, adult beneficiaries will have an immediate right to the trust fund, together with income generated. These are common where the testator wants children to inherit estate assets but they need to be held on trust until they reach maturity.
- Interest-in-Possession Trusts – On the testator’s death, the income or other benefits derived under the trust are to be paid to named beneficiaries. On the death of a beneficiary, the benefits pass to further named beneficiaries (eg their children).
- Discretionary Trusts – After the testator dies, the trustees have discretion as to how and when income generated by the trust fund is allocated to the beneficiaries. No beneficiary has an automatic right under the trust. Discretionary trusts are suitable in circumstances such as where a grandchild has the most need for financial support compared to another; and where the testator wants to preserve assets from being used to fund care home fees.
- Charitable Trusts – On death, the trust income trust is paid to the named charity/ies – attracting specific tax benefits for the estate.
The inheritance tax benefits of the different forms of trust will inform the final decision, but there are wider tax implications to consider. The trust beneficiaries may, for example, be liable for income tax on the income derived under the trust; and CGT could arise on a subsequent sale of property or other trust assets.
Tie up the loose ends
Practitioners should also explain to clients what further steps, if any, need to be done to protect their interests. A recent case illustrates the risks: in Gosden v Halliwell  EWHC 159, a negligently-drafted tax planning scheme led to litigation which was avoidable.
The deceased’s (D) property was subject to a trust of which the claimants and D were trustees. The trust was created for the purpose of carrying an estate protection scheme into effect. However, D subsequently sold the property in breach of trust, without the claimants’ knowledge or consent.
Unfortunately, the solicitors who did the work had failed to restrict D’s ability to sell the property without the consent of her son (one of the trustees); nor did they register a restriction at HM Land Register protecting the beneficiaries’ interest in the property. This amounted to negligence.
It is crucial to choose the right will trust structure that will best implement the client’s intentions. Practitioners must discuss the available options with them, and explain the benefits and disadvantages.
Once the will and any associated documentation are executed, it is important to carry out any further necessary steps, such as protecting any property interests at Land Registry, to avoid a potential claim.