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).
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.
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 names 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?
This 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.
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. People including this sort of trust in their wills will often was a clause stating the re-marriage or co-habiting 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.
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!) pay out.
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