What are Will Trusts?
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Trusts are often used in wills, and come in various forms.
A will trust is an arrangement in your will which places assets in the control of named persons (called trustees) on behalf of other persons (called beneficiaries). There will be terms or ‘conditions’ on how the trust operates which will be set out in the will.
What are the main types of Will Trusts?
The most commonly used will trusts include:-
- Life Interest Trust (otherwise known as an interest in possession trust)
- Discretionary Trust
- Absolute Trust (also known as a bare trust)
What is a Trustee?
The trustees are the persons nominated to administer the trust – ie look after the assets in accordance with the terms of the trust.
Can my Executors also be Trustees?
Yes – and they often are. Executors deal with the administration of your estate (ie selling stuff and paying out legacies etc). Trustees look after any trusts that arise in the will (and so will likely have ongoing responsibilities even after your estate has been finished).
> What’s the difference between an Executor and a Trustee?
Do I need Probate for a Will Trust?
No, but maybe (in a practical sense at least)! Probate is the court order granted to executors to allow them to administer your estate. A trust contained in your will activates on your death, and the will (not probate) grants the legal authority to the trustees to act.
In reality however, the trust will almost certainly need the estate to be administered to have the assets of any will trust transferred from the estate executors to the trustees. Therefore, indirectly, the trust may have needed the executors to get probate to be able to then do their job.
> Excepted Estates – When is probate not required?
What is a Beneficiary?
A beneficiary is a named person who ‘benefits’ from the assets being held for them by the trustees.
Who is the Settlor?
The settlor is the person who set up the trust (also known as a settlement). In the case of a will, the person making the trust (settlor) may also be referred to as the testator (ie the person who made the will).
When does a Will Trust come into effect?
By definition, it will only ‘activate’ when your will comes into effect – ie on your death.
Do I have to have a Trust in my Will?
No, you do not HAVE to have a trust in your will! But, a simple trust may arise without you even realising. For example, a gift in your will to a minor must be held until that named beneficiary has reached 18 (or older if the will specifies that). These are known as bare or absolute trusts.
What is an Inter Vivos Trust?
This is a trust made during your lifetime (ie not in your will). Also known as ‘lifetime settlements’, they will be drafted in very similar terms to a will trust, and the 3 common types of trusts mentioned above also appear as lifetime settlements.
What is a Life Interest Trust?
A Life Interest Trust is where the Trustees hold assets for the duration of a named beneficiary – typically for the lifetime of that person. The beneficiary can ‘enjoy’ the asset, but will never be the outright owner.
What is a Life Tenant?
This is the named beneficiary in a Life Interest trust.
Can a Life Interest Trust be ended before the death of the Life Tenant?
Broadly – yes! And indeed, trusts of this type will often include ‘trigger events’ that may bring the trust to an end.
Examples of Life Interest Trusts
Life interest trusts allow the life tenant to have a defined ‘enjoyment’ of the trust assets. So for example to live in a house, or to receive the income from investments. The capital value of those assets will not belong to the life tenant.
Perhaps the most common use of Life Interest Trusts in wills is with blended families. Here, spouses will often want to make sure that the spouse is able to remain in the family home, but also want to ensure that children from a previous marriage benefit from the capital balance at some point.
> Second marriage and the family home
In that example, it is important that you own the property as tenants in common to ensure your share can pass into the will trust.
On the second death (or sooner) the capital value of the share of the first to die can then pass to their own children.
This is a good illustration also for where ‘trigger events’ other than the death of a surviving spouse may bring the life interest trust to an end. The trust will often have a clause stating the re-marriage or co-habiting of the surviving spouse would bring the trust to an end. It is important that any such clauses are crystal clear to avoid dispute.
What are Remainderman Beneficiaries?
These are the person(s) who take the assets outright following the death of the life tenant. So in the example above, the children of the deceased.
Bare trusts arise where gifts in your will to children are not yet 18 (or older if your will specifies).
What is a Discretionary Trust?
A discretionary trust is just that – a trust which gives discretion to the trustees to give what they want, to whom they want, when they want (in overly simplistic terms).
Like a life interest trust, there will be appointed trustees. However, rather than there being defined terms which the trustees must adhere to, a discretionary trust will be open leaving all decisions to the trustees.
What is a Class of Beneficiaries?
A discretionary trust will likely include a group of possible beneficiaries (remember they have no absolute entitlement). And, that group of people can be named, or might often include a more generic reference (eg ‘my grandchildren’).
Can I tell my Trustees what I want to happen with a Discretionary Trust?
Yes and no! You must not seek to bind your trustees else the discretionary nature of the trust may be challenged. It is OK to have a ‘letter of wishes’ setting out thoughts that you have which must NOT seek to bind them.
It is important that any stated wishes do not remove the discretionary status of the trust. But, it is OK to set out ‘wishes’ you might like your trustees to be mindful of when administering the trust. These can be included in a letter of wishes.
Why have Discretionary Will Trust?
Discretionary Will Trusts will often be used where the person making the will wants to get money to someone, but to delay it. Due to the discretionary nature, the law states that the possible beneficiaries have no absolute right to the trust assets, and so nobody in their life can get those assets!
So for example, if the grown-up child of a testator is themselves going through a divorce, or has become bankrupt, the parent may wish to place part of the estate into a discretionary trust so that the (grown-up) child in question will not have a claim on their element of the estate. Then, once the bankruptcy or divorce is resolved, the trustees may (at their discretion!) payout.
What’s the difference between a Life Interest Trust and a Discretionary Trust?
In its simplest form, a life interest trust defines what the trustees must do – that being that the ‘life tenant’ receives the benefit of assets during their lifetime, and the ‘remaindermen’ then receive the assets outright when the life tenant dies. It is defined therefore both in terms of duration and who gets what. A discretionary trust however leaves everything to the discretion of the trustees. (NB there are exceptions to this over simplified explanation).
What is a Bare Trust?
A bare trust (also known as an absolute trust) is where the beneficiary attains an interest in the estate asset, but it is conditional upon something (usually age). The most common example is gifts in wills to minor children. If the testator dies before the beneficiary reaches 18 (or any later age set in the will), then the money must be held until that specified age is reached.
Are Will Trusts Taxable?
Potentially yes. Will trusts may be liable to income, capital gains, and inheritance tax.
Help with Will Trusts?
Will trusts are a minefield. You may be setting something up in your will that could last for many years after your death, and impact your loved ones significantly if you don’t get things right. Perhaps the most important thing (even over the drafting of the will trust) is to get expert advice on what (if any) will trusts are right for you. You can reach out to our expert wills and trusts solicitors by calling 03300 020 365 or emailing wills@QLAW.co.uk
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Hello!
What actually makes a will a discretionary trust? What are the key elements it must contain in order to be treated as such?
My partner was appointed sole executor and trustee of his mother’s will.
The document names the beneficiaries and identifies the assets to be inherited (cash and bank accounts, no property).
One clause adds: ‘I give devise and bequeath to my trustee…’.
I know it is difficult to say for certain without seeing the document, but does it sound like a discretionary will?
Thank you!
Hi – and great question! The phrase you have quoted doesn’t suggest necessarily that there is a discretionary trust (DT). What that will depend on is what followed – ie were the gifts to be bequeathed made absolute/unconditionally, or otherwise. Thanks so much for visiting QLAW!
My father-in-law has died and has a will trust. All his assets pass into a trust. My wife and mother-in-law are both named as trustees and beneficiarys.
My question really is, what immediate tax liability arises on submission of IHT400 and a copy of the will? The estate is above the normal threshold for IHT exemption.