EXPLAINER: Will Trusts - Protecting your children's future
By Lynch Solicitors Ltd
Making a Will is one of the most important steps you can take to protect your family and provide certainty for the future.
Many people delay making a Will because they believe they can deal with it later. However, failing to put a Will in place can create unnecessary difficulties for those left behind and may result in your assets being distributed in a way that does not reflect your wishes.
If you do not make a plan, the law will make one for you.
What Happens If You Die Without Making A Will?
If you die without a valid Will, your estate will be distributed in accordance with the rules of intestacy.
Where you leave a spouse and children:
- Your spouse is entitled to two-thirds of your estate;
- Your children share the remaining one-third equally.
If you leave a spouse but no children, your spouse inherits the entire estate. If there is no surviving spouse, your children inherit the estate equally.
While these rules provide a default distribution, they may not reflect what you would have wanted. In some cases, they can also result in children acquiring an immediate entitlement to part of the family estate at a young age.
What Is A Will Trust?
For parents of young children, a Will Trust can provide greater flexibility and protection by allowing assets to be managed for the benefit of children until they reach an age or stage in their lives that you consider appropriate.
Rather than leaving assets directly to children, a Will Trust allows parents to decide how assets should be managed and used for their children’s benefit.
Different types of Trust arrangements can be considered depending on the circumstances of the family and the needs of the beneficiaries.
Tax implications must always be considered when creating a Trust, and specialist tax advice should be obtained where appropriate.
For a child with special needs, it is worthwhile to consider setting up a discretionary trust with the child as the sole beneficiary.
Discretionary Trusts
A discretionary trust is a private legal arrangement whereby parents can pass assets to a trustee, who holds them for the child’s benefit.
The Will directs the trustees to use the money or assets to maintain the child, but the trustees have absolute discretion on how and when the money is used, if at all.
The beneficiary of the Trust will never become entitled to the funds or assets in this case, and they have no power to direct how the assets are used.
This flexibility allows trustees to respond to changing circumstances and make decisions in the best interests of the beneficiaries.
Who Owns The Assets In The Discretionary Trust?
The trustees hold legal title to the trust assets, but only in their capacity as trustees, not for their own benefit. They are legally obliged to manage the assets in accordance with the terms of the trust and in the best interests of the beneficiaries.
What Happens If The Estate Includes Property?
Where property forms part of a Will Trust, the executors will transfer the property into the names of the trustees, who will thereafter hold the property as trustees in accordance with the terms of the Will.
The trustees are then responsible for managing the property until it is transferred to the beneficiaries in accordance with the trust.
Discretionary Trust Tax
Certain discretionary trusts may be subject to discretionary trust tax.
In general:
- An initial levy of 6% of the value of the trust assets may arise; and
- An annual levy of 1% may apply thereafter.
However, there are important exemptions and deferrals. For example, different rules may apply where the trust is established for a person with a qualifying disability or where the beneficiaries are young children.
As the taxation of trusts is complex and depends on the particular circumstances, professional legal and taxation advice should always be obtained.
Fixed Trusts
Another option is a fixed trust. Under a fixed trust, each beneficiary has a defined entitlement to a specified share of the trust assets.
For example, your Will might provide that each child receives an equal share of your estate when they attain a specified age.
Unlike a discretionary trust, the trustees have little or no discretion about each beneficiary’s entitlement.
Estate Planning
Making a Will is only one part of effective estate planning. You may also wish to consider how your business, farm or investment assets should pass to the next generation.
Lifetime gifts, succession planning and tax-efficient transfers can all form part of a wider estate planning strategy.
The starting point is ensuring that you and your family are financially secure. Once that has been achieved, careful planning can help ensure that your assets pass to the people you choose, in the most appropriate and tax-efficient manner possible.
So Where Do You Go From Here?
Every family’s circumstances are different. A properly drafted Will, together with appropriate trust provisions where necessary, can provide financial security for your loved ones, protect young beneficiaries and ensure that your wishes are carried out.
Taking advice now can provide certainty for the future and peace of mind for those you leave behind.
For further advice or if you wish to discuss any other legal area please contact [email protected] or telephone 052-6124344.
The material contained in this blog is provided for general information purposes only and does not amount to legal or other professional advice.
While every care has been taken in the preparation of the information, we advise you to seek specific advice from us about any legal decision or course of action.