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Wills, Trusts & Power of Attorney

By Nicolae Trofin

01424 217871

Will Trusts

There are various types of trust we can set up, depending on the circumstances

Standard Discretionary Trusts

A Discretionary Trust is a trust which leaves the distribution of the trust property (either capital, income, or both) to the absolute discretion of the Trustees. When choosing to set up a Discretionary Trust within a Will the trust does not come into effect until the testator dies, once the trust is set up the assets within it are held by the Trustees. The Discretionary Trust gives the Trustees the discretion to either retain and hold the assets within it or distribute all or some of the assets between a given list of named ‘potential’ beneficiaries. The beneficiaries are only ‘potential’ beneficiaries because they have no absolute entitlement to any of the trust assets, as distribution is at the sole discretion of the Trustees as described. A letter of wishes should be present to help the Trustees to understand what the testator’s intentions are with regard to benefit from the trust.

In what circumstances would you consider a Discretionary Trust?

  • One or more of the intended beneficiaries are not wise with money; the client is worried that if the beneficiaries in question are given a large sum of money they may not spend it appropriately. The DT is a possible solution to this issue as the Trustees may pay the trust assets to the intended beneficiaries in such a way as they feel appropriate given the circumstances at the time.
  • One or more of the intended beneficiaries are going through a divorce or are in relationships which are considered likely to lead to divorce in the future. Passing their share into a DT means that the assets are held outside of their estate and are not taken into account in any divorce settlement. The Trustees have the flexibility to pay the assets out to the beneficiary once the Decree Absolute is finalised.
  • Where the testator intends to make a series of lifetime gifts to their beneficiaries and they would like them to ultimately receive an equal amount, so such gifts need to be taken into account when dividing the estate. This allows the Trustees to find out what gifts were made before the date of death of the testator and divide the trust assets in respect of this.
  • Where the testator has an intended beneficiary who is disabled but they do not wish to create an immediate post-death interest for this beneficiary (see Disabled Persons Trust). This could be because the beneficiary is on means-tested benefits and they do not wish to lose them. Using the standard DT would allow for the Trustees to pay the assets out to the disabled beneficiary in such a way as that it would not affect their benefits. 

 

Property Protection Trusts

The Property Protection Trust (PPT) is a Life Interest Trust incorporated into a Will which allows the testator to give a lifetime interest in their share of the main residence (or the whole of the beneficial interest in the main residence if solely owned) to a beneficiary of their choice, this beneficiary would be called the Life Tenant. Giving them a lifetime interest means that the Life Tenant will never own the property or share of the property that is held in trust absolutely, however they will be entitled to lifetime enjoyment of the property and any income which may arise (i.e. if they decide to let the property out). When the Life Tenant no longer has a right to benefit from the property due to their death or by termination of the trust, the property is subsequently passed to the ‘remainderman’ beneficiary/ies as described in the Will.

 

In what circumstances would you advise a PPT?

  • One of the most common reasons for the use of a PPT is to protect against what is known as ‘sideways disinheritance’. Sideways disinheritance is simply the common act of the spouse/partner of the deceased remarrying or recoupling and deciding to favour the new family in their Will. This could result in the intended beneficiaries of the deceased, often their children, receiving less or even no share of the property.

 

  • Another reason you may suggest the use of a PPT to your clients is if they express concerns over asset preservation should one of them require long term care in the future. Many clients’ largest asset is the property in which they reside and this is often something clients want to preserve the worth of in order to maximise the inheritance passed to their chosen beneficiaries. The PPT offers protection following the ‘first death’ by passing the deceased’s share of the property into trust rather than directly into the estate of the survivor. This means that if the survivor requires long term care in the future then they do not have the deceased’s share of property calculated as part of their wealth, but they do have a lifetime interest in it so they can enjoy it as if it is their own.

 

The Right of Residence Trust

The Right of Residence Trust (RoR) also known as a Right of Occupation Trust is a Life Interest Trust incorporated into a Will, which allows the testator to give the whole of the beneficial interest in their solely owned main residence to a beneficiary of their choice. This beneficiary would be called the Life Tenant, albeit that the period of their interest in the property may not be for their life. Giving them an interest means that the Life Tenant will never own the property that is held in trust absolutely, however they will be entitled to enjoyment of the property. When the Life Tenant no longer has a right to benefit from the property due to an event such as their death or by termination of the trust for a specified reason, the property is subsequently passed to the ‘remainderman’ beneficiary/ies as prescribed in the Will.

In what circumstances would you advise a RoR Trust?

  • The most common reason for the use of a RoR Trust is to allow another person to live in the testators solely owned property after their death until a certain point, after which the property passes to their chosen beneficiary or beneficiaries. This results in the chosen beneficiaries, often their children, receiving the value of the property at that time.

 

  • This situation is often when a testator solely owns their property and has another person living with them such as a spouse/partner or a relative, and they want to ensure that should they die first then their spouse/partner or relative will have a right to live in the property, but ultimately someone else will inherit the property. The chosen beneficiary or beneficiaries are often children of the testator from a previous marriage or relationship who they want to see eventually inherit.

 

  • The right of the life tenant to reside in the property is not necessarily for a life period, which may not be appropriate anyway e.g. if the life tenant is younger than the testator and they want their children to inherit the property at a specified time. So the right of residence may be “time restricted” e.g. a period of years or until children achieve a certain age, or “event restricted” e.g. if the life tenant themselves re-marry, co-habit in or leave the property, when their right to reside in it would cease and the RoR Trust ends.

 

Flexible Life Interest Trusts

The Flexible Life Interest Trust (FLIT) incorporates two separate Life Interest Trusts into a Will. The first Life Interest Trust concerns your main residence (much like the PPT) and the second trust captures the residue, minus chattels (personal possessions).  The trusts give a lifetime interest in the property and residue to a beneficiary of their choice, this beneficiary would be called the Life Tenant. Giving them a lifetime interest means that the Life Tenant will never own the assets that are held in trust absolutely, however they will be entitled to lifetime enjoyment of the property and other assets and any income which may arise (i.e. if they have rentals or income producing investments). When the Life Tenant no longer has a right to benefit from the assets due to their death or by termination of the trust, the property is subsequently passed to the ‘remainderman’ beneficiary/ies as described in the Will.

In what circumstances would you use a FLIT?

  • One of the most common reasons for the use of a FLIT is to protect against what is known as ‘sideways disinheritance’. Sideways disinheritance is simply the common act of the spouse/partner of the deceased remarrying or recoupling and deciding to favour the new family in their Will. This could result in the intended beneficiaries of the deceased, often their children, receiving less or even no share of inheritance.
  • Another reason you may suggest the use of a FLIT to your clients is if they express concerns over asset preservation should one of them require long-term care in the future. The FLIT offers protection following the ‘first death’ by passing the deceased’s share of the property into trust rather than directly into the estate of the survivor. This means that if the survivor requires long term care in the future then they do not have the deceased’s previously solely owned assets calculated as part of their wealth, but they do have a lifetime interest in it so they can enjoy it as if it is their own.
  • Where a client has more than one property or a property and other assets of value within his/her estate and wishes for all of this value to be protected in respect of the above reasons.
  • Where your clients are married, have a concern over their IHT bill on second death and are interested in reducing the amount chargeable to tax by loaning assets to the survivor after first death, and provided they spend the cash their second death estate will be a reduced amount.

 

Business Property Trusts

You may own a business that is eligible for an inheritance tax relief known as Business Property Relief, applicable to most types of trading or service businesses. Under some circumstances this relief may not be fully utilised, resulting in a much larger than necessary inheritance tax bill.

A Business Property Trust is a type of discretionary trust aimed at avoiding this. However, more importantly those people with businesses virtually never plan for the passing on of their shares in their businesses, resulting in unforeseen consequences for the remaining co-owners as well as tax consequences.

APS Legal & ASSOCIATES can provide expert specialist advice in this area.

The Business Property Trust (BPT) is a form of Discretionary Trust written into a Will which attracts all assets owned by the testator that qualify for 100% Business Property Relief (BPR) at their death. The purpose of the BPT is to make use of the IHT relief gained by certain qualifying business assets by transferring such qualifying assets into trust without this particular transaction affecting the available Nil Rate Band of the deceased. The BPT can be a very effective tax-planning solution for the right client, as described within this fact sheet.

 

What assets qualify for 100% Business Property Relief?

  • A holding of shares in an unquoted company
  • A business or interest in a business

Please note that only certain categories of business type will allow the assets to qualify for BPR, therefore business owners should obtain a professional confirmation on whether they do or do not qualify.

Key features of the BPT

  • Only business assets that qualify for 100% Business Property Relief will fall into the trust, not business assets that qualify for 50% Business Property Relief.
  • The BPT is a form of discretionary trust, the Trustees have discretion over what happens to all assets within the Trust in respect of whether the business continues to run, or is sold and assets distributed. They will also have discretion over distribution to the named potential beneficiaries.
  • A letter of wishes will be produced as a supplementary document to a BPT Will as informational direction for the Trustees about how the testator wishes them to deal with the business assets within the Trust Fund.
  • The BPT contains loan provisions, which allows for any of the potential beneficiaries to loan from the Trust Fund, this can only be agreed by the Trustees and is repayable upon terms set out by the Trustees.

APS Legal & Associates is a Member of the Institute of Professional Will Writers

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