Our Director of Estate Planning, Natasha Jones (TEP), answers your questions on why you should consider a Trust as part of your Will
Trusts protect inheritance like nothing else can, and they’re becoming more and more common as people realise you don’t need to be super-wealthy to benefit from them.
But most people don’t know enough about why they should be used, or what they give you that a Will won’t.
At Kinherit, we explain to all our clients the advantages of our Estate Protection Trust, and thought we’d share some of the answers to questions we get asked every day.
What does a Trust give you that a simple Will doesn’t?
Essentially, a Trust gives you more protection, flexibility, and peace of mind.
If you pass on inheritance to your family using just a Will, your money becomes part of their personal estate and is more vulnerable to threats (like divorce, remarriage, care fees, etc.).
If you pass on inheritance using a Trust, your money effectively has a fence placed around it to protect against these threats. You also have more control over what happens to your money and when.
How is a Trust set up?
An Estate Protection Trust is written into your Will, and is only set up on your death. It becomes the place your Will directs your money to – instead of to specific people.
Doesn’t a Trust just overcomplicate things?
Many people think a Will alone is enough to carry out their wishes. They see setting up a Will as simple – so why ‘overcomplicate it’ with a Trust?
The reality is often very different. A Will isn’t always enough to make sure your wishes happen. Sometimes, not having a Trust can complicate wishes on death, leaving executors and loved ones to pick up the pieces.
How does a Trust protect against divorce?
Divorce is, unfortunately, becoming more and more common (especially with the new ‘no fault’ divorce now in play).
If inheritance is passed on via a Will, it’s incredibly difficult to keep this money separate from what’s deemed to be the ‘matrimonial pot’ (and therefore fair game for an ex-spouse). A Trust can ringfence this money, protecting it for your intended beneficiaries only.
Why is a Trust particularly important for blended families?
“I’m leaving everything to my partner, and they’ll then leave everything equally to my two children and their two children.” This is a phrase we hear frequently.
Sadly, something we also hear frequently is when this doesn’t happen – and the two children end up with nothing. And it’s not always deliberate. A Trust can stop this from happening, but a Will alone can’t.
Why is Trust flexibility a good thing?
As much as we’d like to, we can’t predict the future. It can be difficult to know in advance what your beneficiaries may need following your death, especially if they’re still children.
A Will requires firm, absolute decisions, despite not knowing what the future holds. A Trust is a bit like still having you around to make decisions on the best use of your money at the time it’s needed.
Why is a Trust better at providing support for guardians?
A Will only allows you to specify a total amount to be left to support guardians (which might be too much or too little, depending on the age of the children).
A Trust can give the flexibility to ensure an appropriate allowance is paid each month (for example) instead of giving a guardian a lump sum and hoping it will be spent wisely.
How does a Trust protect inheritance if remarriage occurs?
Typically, spouses give their estate to the surviving spouse on death. If a widowed spouse remarries, their Will is no longer valid. This can result in the originally agreed upon beneficiaries receiving significantly less, if anything at all.
A Trust can ringfence the deceased spouse’s share of the estate, protecting it from being inherited by any future spouse, and ensuring it goes to their chosen beneficiaries as intended.
How does a Trust protect against care fees or bankruptcy?
If you inherit via a Will, it becomes part of your personal estate. You could be forced to use it to pay for care fees or bankruptcy debts. If the money is in a Trust, it can be protected.
Is an Estate Protection Trust for everyone?
Simply put, no. If you’re leaving your estate to a charity or have no concern over what happens to your estate after death, the trust won’t really benefit you.
But it’s important that you understand the options relevant to your situation, so you can make an informed decision. Often people realise that a Trust is the only way to achieve what they really want.
Does a Trust eliminate Inheritance Tax (IHT)?
Not immediately. You’ll still have to pay IHT on your estate when you die. BUT anything you pass on via a Trust isn’t taxed for IHT again when the first set of beneficiaries die (ultimately meaning more money is passed onto the next generation).
For example, if your child inherits money through a Trust it means the assets are not part of their estate, so their IHT liability won’t increase on their death. Instead of another 40% IHT charge on this money when they die, the remainder of the estate follows the wishes of your Trust (perhaps to the next generation, for example).
Who controls the Trust?
The Trustees you choose will control the Trust, but you state who you’d like to benefit from it, and how they should benefit.
It’s the trustees’ job to run the Trust in the best interests of all the beneficiaries and according to your wishes. Trustees can also be beneficiaries.
How many trustees should you have?
It’s up to you, but most of the time at least two will legally be required.
It’s important you choose people you trust (as the name suggests!) and we’d always encourage appointing one professional trustee, either at the outset or by your trustees at that time.
A professional trustee will know the best and most efficient ways to manage a Trust, all whilst ensuring the assets remain protected.
Will a Trust mean lots of admin?
It’s true, there is some admin involved with a Trust. But this is nothing compared to the issues a family may experience if a Trust isn’t in place, and the protective benefits it can bring.
Having a professional trustee will ensure the Trust is run efficiently and will keep admin and responsibility to a minimum.
Isn’t a Trust expensive?
Including a Trust in your Will is more expensive than a Will alone, but the money it can save your family will be worth much more.
Running a Trust does also involve some costs (professional fees and certain taxes), but again, these would be far outweighed by the protection you’re getting.
Are Trusts tax efficient?
We’re unable to give regulated tax advice, and every situation is different, but it’s widely accepted in the professional Estate Planning community that Trusts can be a highly tax efficient way of managing family wealth (even taking into account the Periodic and Exit charges).
However, this does assume the trust is professionally managed, which is why we encourage clients to include a professional in their list of trustees. This way, the trust remains simple and cost effective, with little admin for the family.
How can beneficiaries access the money in a Trust?
The Trustees provide access to the contents of the trust. They make decisions about what to give, and when and how to give it, based on your instructions.
In terms of accessing money, trustees can use ‘loans’ to give to the beneficiaries. These aren’t your typical bank loan – there would be no interest to pay, and often no repayment date. It’s a protection mechanism.
How are assets protected once they’re given to the beneficiary?
The simple answer, is good trustee management.
If a beneficiary needs cash for a house deposit, as an example, the trustees could ‘loan’ this amount and record it appropriately. If that beneficiary then divorces, the trustees can clearly show that sum of money is owed back to the trust and shouldn’t form part of the matrimonial pot.
Another example would be a house purchase. Instead of giving the money to the beneficiary to purchase a property, the Trust can purchase it instead. The property is then in the Trust’s name, not the beneficiary’s (so it isn’t deemed part of the beneficiary’s estate).
Ultimately, good Trust management ensures the flexibility and protection.
Can you still maximise inheritance tax allowances with a Trust?
Our Estate Protection Trusts are structured to ensure you’ll still benefit from both the nil-rate tax band and the residential rate band (if applicable to you). Not all Trusts are set up to do this.
This means that (at a minimum) having a Trust makes your estate no worse off tax-wise on your death than if you just had a Will. But your Will won’t give you the additional protections that a Trust will also provide.
So in summary…
Trusts are a personal choice, but are often the only way to achieve exactly what you want for your family.
A Trust can be straightforward and cost effective to run, and will give your family the level of protection a Will just can’t provide.
We can talk you through exactly how a Trust might apply to your personal situation, as well as explain the benefits of our Intelligent Will, which includes our free handover platform, the Kinvault.
Learn why our Intelligent Will is different
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