Simply a Will Trust is any trust created by a person’s will. It doesn’t come into effect until their death. The settlor of the trust for tax purposes will be the deceased testator. A Will Trust is also created when using a deed of variation. However a deed of variation will regard the deceased testator as the settlor for Inheritance Tax (IHT) but the beneficiary who requested the variation will be treated as the settlor for Income and Capital Gains Tax (CGT) purposes.
Why create a Will Trust?
Most commonly people use Will Trusts to help mitigate IHT, although they can be set up to meet a wider range of objectives. These could include providing for a surviving spouse, while protecting underlying capital for children from an earlier marriage. Another common use if creating legacies for minors and young adults. Will Trusts can also be used to help provide for a relative with disabilities, protecting any entitlement to benefits.
Discretionary Will Trusts
Despite the introduction of the transferrable IHT nil rate band back in October 2007, a Discretionary Will Trust can be advantageous if members of next generation are independently wealthy and therefore trustees can make loans to the beneficiaries giving them access without increasing the value of their IHT estate.
Nil Rate Band Discretionary Trusts
These were used extensively prior to the changes in 2007, as they were often set up to use the full nil rate band on first death. If the will hasn’t been reviewed then upon death the trust comes into force. This will normally use up all of the deceased’s nil rate band. The exception to this is when the value of the deceased’s free assets is less then their available nil rate band.
If no action is taken, there will be no scope for taking advantage of the transferrable nil rate band on second death. This may or may not be disadvantageous as it will depend upon future values of the survivors assets etc..If the Nil Rate Band Discretionary Trust isn’t needed then as long as no interest in possession has arisen the trust fund can be appointed to the surviving spouse provided it is done more than 3 months and less than 2 years after death. This has the same effect as if the trust had never been created and therefore the transferrable nil rate band can be claimed upon second death.
Life Tenant Trusts (Interest In Possession)
This type of trust has two types of beneficiary, the life tenant and the remaindermen. Whilst these can be complicated, the most basic version works like this. The life tenant has the right to occupy or to receive income (depending upon asset type) for the rest of their life, with the remaindermen becoming absolutely entitled to the trust capital on the death of the life tenant. Unless the trust asset is property, the trustees should consider income producing assets as this will allow them to best provide income for the life tenant and also capital growth for the remaindermen, as often these two objectives are hard to meet.
Trusts for Minors and Young Adults
A minor is defined as someone aged under 18 in Northern Ireland, although this type of trust often doesn’t vest an interest in possession until the age of 21 or say 25. The will doesn’t even have to mention the word trust as it is assumed in law to have been created if the will refers to a legacy being left to a minor for when they reach a certain age.
Disabled Persons’ Trusts
Almost any kind of Will Trust can be used for a beneficiary who lacks mental capacity to deal with their own affairs. The trustees will administer the trust on the beneficiaries behalf.
A Discretionary Trust has the advantage of keeping both income and capital out fo the scope for means testing. This is extremely beneficial for someone with physical disabilities receiving state benefits, as well as for someone who doesn’t have the mental capacity to look after their own affairs. Any capital or income paid out to the beneficiary is subject to means testing, however the trust normally provides the power for the trustees to make appointments of capital directly out of the trust fund to buy assistive equipment, pay for a holiday or respite care, for example.
Some types of discretionary trust may qualify for special tax treatment thus avoiding the periodic charges etc.. associated with discretionary trusts.
As you can see this area of advice is very complicated and there can be various tax implications so it is best to seek out advice first. For more information or if we can help with any of your trust planning please do not hesitate to contact me at our offices.
Paul Dixon FPFS
Chartered Financial Planner