As a wills specialist, one of the most common misconceptions we at KWW Solicitors encounter is that estate planning simply involves writing a will.

While a well-drafted will is the cornerstone of any robust estate plan, it’s often just the beginning. For many individuals and families, particularly those with complex circumstances or significant assets, the strategic use of trusts can be an invaluable tool.

At its heart, a trust is a legal arrangement where you (the ‘settlor’) transfer assets to a third party (the ‘trustee’) to hold and manage for the benefit of specific individuals or causes (the ‘beneficiaries’).

Essentially, you’re separating the legal ownership of assets from their beneficial enjoyment. This seemingly simple concept unlocks a powerful array of benefits, allowing for greater control, flexibility, and protection over your legacy.

Why Consider a Trust? Beyond the Basic Will

While a will dictates how your assets are distributed upon your death, a trust can operate during your lifetime and continue long after you’re gone. This extended reach offers several compelling advantages:

Asset Protection: Trusts can be highly effective in safeguarding assets from various risks. For example, they can protect inheritances from being eroded by divorce settlements, bankruptcy, or simply from beneficiaries who may not be ready or able to manage a large sum of money responsibly.

For those concerned about future care home fees, certain types of trusts can help protect a portion of your wealth from being assessed by the local authority, though this area requires careful planning and expert advice to avoid “deliberate deprivation” challenges.

Control and Flexibility: You might wish to provide for a spouse or partner but also ensure your children from a previous relationship ultimately inherit your wealth. A life interest trust is a common solution here, allowing your spouse to benefit from assets (e.g., live in a property or receive income from investments) during their lifetime, with the capital passing to your children upon their death. Discretionary trusts, on the other hand, give trustees a wide degree of flexibility to decide how and when assets are distributed among a class of beneficiaries, which can be invaluable when circumstances are uncertain or vary among beneficiaries.

Minimising Inheritance Tax (IHT): While not the sole purpose, trusts can play a significant role in mitigating IHT. By transferring assets into certain types of trusts during your lifetime, those assets may fall outside your estate for IHT purposes after a period of seven years.

However, it’s crucial to understand the different tax implications for each type of trust, including potential charges on transfer into the trust, 10-year anniversary charges, and exit charges. This is a complex area where professional advice is paramount.

Providing for Vulnerable Beneficiaries: For individuals with disabilities or those who may struggle to manage their own financial affairs, a trust can ensure their long-term financial security without jeopardising their entitlement to state benefits. Specialist trusts can be tailored to meet their specific needs, providing peace of mind for you and their future carers.

Business Succession: Trusts can facilitate the smooth transfer of a family business, ensuring its continuity and protecting it for future generations, often with tax efficiencies.

Different Types of Trust

The world of trusts is diverse, with various types designed for different purposes. Some of the most common include:

Bare Trusts: Simple trusts where the beneficiary has an immediate and absolute right to the assets and income. Often used for gifting to children.

Interest in Possession Trusts: As mentioned, these grant a beneficiary the right to income from the trust, with the capital preserved for others.

Discretionary Trusts: Trustees have discretion over distributions of income and capital to a class of beneficiaries.

Will Trusts (Testamentary Trusts): These are established within your will and only come into effect upon your death. They can incorporate any of the trust types mentioned above.

The Role of the Trustee

Central to any trust is the trustee. These are the individuals or professional entities you appoint to legally hold and manage the trust assets according to your wishes, as set out in the trust deed. Their duties are significant and include:

• Acting in the best interests of the beneficiaries
• Complying with the terms of the trust deed and relevant law
• Managing and investing assets prudently
• Keeping accurate accounts
• Dealing with tax obligations.

Choosing the right trustees is vitally important. They should be trustworthy, financially astute, and willing to undertake the responsibilities involved. Many individuals opt for a combination of trusted family members and professional trustees for a balanced approach.

The Importance of Expert Advice

Given the intricacies of trust law and the significant tax implications, attempting to set up a trust without professional guidance can lead to unintended consequences. At KWW, we see our role as being to:

• Understand your unique circumstances, objectives and concerns
• Explain the different types of trusts and their suitability for your situation
• Draft the necessary legal documents, including your will and trust deeds
• Guide you in appointing appropriate trustees.

Estate planning is not a one-size-fits-all solution. Trusts offer powerful ways to protect your legacy, provide for loved ones, and ensure your wishes are carried out long into the future.

If you believe a trust could benefit your estate plan, seek tailored legal advice to explore the possibilities and create a plan that truly reflects your aspirations.