There are two main types of Will trusts which includes:
- Life interest trust (otherwise known as an immediate post death interest trust)
- DWT (Discretionary Will Trust)
Life interest trust (otherwise known as an immediate post death interest trust)
A life interest trust is one where the beneficiary of a trust has an immediate and automatic right to the income from the trust as it arises. The trustee (the person running the trust) must pass all of the income received, less any trustees’ expenses, to the beneficiary.
A beneficiary who is entitled to the income of the trust for life is known as a 'life tenant' or as ‘having a life interest’.
A beneficiary who is entitled to the trust capital is known as the capital beneficiary.
The Life Tenant often doesn’t have any rights over the capital of such a trust - instead the capital will normally pass to a different beneficiary or beneficiaries in the future.
Any asset can pass into a life interest however it is normally a property. If it is property it needs to be owned as tenants in common or solely.
The trust period normally ends if the death of the life tenant but it is possible to end the life interest at another time such as on remarriage or after a specified period of time.
If a property is put into an life interest trust the life tenant will have the option to move and then could downsize if they wish and the remaining money will be invested and the life tenant will be entitled to the income from that investment.
A life interest trust is not effective for IHT (Inheritance Tax) purposes however it is useful to protect against hostile creditors after first death. One of the main reasons IIP’s are used are to preserve and asset.
John and Mary are married and own a home together. They both have children from previous marriages. They write their Wills to include an IIP trust and sever the tenancy of their property so that it is owned as tenants in common. If John dies first Mary will be entitled to live in his share of the family home however his share will not pass to her. On Mary’s death her share of the property will pass according to her Will which would be to her children. As the interest in possession has ended due to Mary’s death John’s share will now pass to his capital beneficiaries which would be his children.
It would have been impossible for Mary to amend the terms of the trust to disinherit John’s children so his share of the property will always be preserved.
- Protects assets against hostile creditors such as:
- Long term care costs (only for assets of the first to die)
- Ensures assets go to the correct beneficiaries
Who would this benefit:
- Anyone who has children from previous relationships
- Anyone who has a big age gap in their relationship and remarriage is a concern
- Anyone worried about hostile creditors
- Anyone wanting to ensure that there asset passes to the correct beneficiaries
Read about our Life Interest Trust Case Study to find out how we can help you.
DWT (Discretionary Will Trust)
A discretionary Will trust is one where the beneficiaries have no entitlement to capital or income of the trust. The trustee (the person running the trust) has complete discretion as to who receives both capital and income and when.
There must be a minimum of two beneficiaries who have the potential to inherit. There is no maximum and therefore a class can be added such as my children and grandchildren. The beneficiaries must be identifiable by the trust and the amount of beneficiaries must not be so great that it is impossible for the trustees to administer the trust.
Any asset can pass into a DWT on death such as property, a percentage of your estate or a specific amount. If it is property it needs to be owned as tenants in common or solely.
The trust period is 125 years from the date of death however if all of the assets are distributed before this time the trust will then come to an end.
A DWT is not required for IHT purposes unless you are considering long term planning for instance you do not wish to pass your assets directly to your son as he has assets in his own right and therefore you do not want to give him a large inheritance therefore increasing his estate for IHT purposes you only want to give him the potential to benefit should his circumstances change in the future. The trustees can then make the decision to pay it out to him if required or if not keep the assets until the son’s death at which point the trust can be distributed to the other beneficiaries being his children.
Please note that DWT may sometimes have adverse tax consequences depending on your estate and further guidance should be sought.
One of the most common reasons for a DWT is for people who have beneficiaries who are unable to manage their own affairs due to disabilities or addition. This would allow the trustees to keep control or the affairs while taking into consideration the needs of the beneficiaries.
- Allows trustees to make decisions after death
- Allows trustees to manage affairs for a person who is incapable
Who would this benefit:
- Anyone who wishes has people the wish to inherit who are incapable of managing their own affairs
- Anyone who is unsure about how to distribute their estate as they are unsure of their beneficiaries financial situations on their death
Read about our Discretionary Will Trust Case Study to find out how we can help you.