Trusts & Wills

Mention the word Trusts to most people, and they recoil in horror. “That’s complicated” or “That's for people with lots of money” are comments we commonly hear at TFS. However, by not considering Trusts, you miss valuable opportunities to protect your assets. Trusts are a very useful tool that can be used in Wills to protect assets from future events. They do this by allowing a person(s) to benefit without ever being the legal owner.

Consider George & Rose’s situation.

1. George and Rose come to see TFS. Both have brought money and assets into their marriage. They recently purchased their home which they own as joint tenants. Their financial position is as follows:

• home £400,000.00

• joint accounts £75,000.00

• holdings in George’s sole name £100,000.00

• holdings in Rose’s sole name £350,000.00

2. Both George and Rose have been married before.

3. George has a son, Paul, and a daughter, Lucy, from his first marriage. Both Paul and Lucy have children of their own and live in a different part of the country from George and Rose, several hours away.

4. Rose has a son, Stephen, from a previous relationship. Stephen has never married and has no children. However, he is engaged to be married to someone neither George nor Rose like very much and they worry that any marriage would not last.

5. George and Rose want to instruct TFS to make Wills, leaving everything to each other on the first death. On the second death, they would like their estates to pass to their children. If any of their children die before the survivor of them, leaving children of their own (George or Rose’s grandchildren), these children will inherit the share which would have passed to their parents.

On the surface, the situation seems simple and straightforward. However, have George and Rose really thought this through?

The value of Rose’s estate is larger than George’s. Have they considered this? Is this to be reflected in the value of the gifts to their children on the second death?

Did they both equally contribute to the purchase of their home? Do they want to take account of any difference when considering what their children should ultimately inherit?

Let’s say Rose died first. If they had made the simple Wills they had in mind, George would inherit the entire estate. However, many things could happen to George after Rose’s death which would affect what the children might ultimately receive on George’s death. Some of these events would be within George’s control, however, and more worryingly, some would not.

• Longevity

The longer George lives, the more funds he will need, and the longer their children have to wait to receive an inheritance (if any).

• Health

If George ever needs care, this will impact George’s expenditure, particularly, if he ever needs to move into a care home*.

• Romantic life

George might remarry (and potentially divorce), or may decide to move a new partner into the home he once shared with Rose.

• Lifestyle

George’s spending could increase. This would reduce the inheritance which could ultimately pass to the children (if any).

• Family relationships changing

George may have a falling out with Stephen. George could make a new Will which does not include Stephen at all.

• What happens if any of the children die in George’s lifetime?

Paul and Lucy have children of their own, so any share due to them could pass to their children. However, what about Stephen? He has no children. George and Rose have already expressed clear feelings about his fiancé.

When these possibilities are brought to George and Rose’s attention, they both express concern. What, if anything, can they do?

Both George and Rose want to provide for the survivors. They are clear the survivor is to be the priority. However, they also want to ensure that their children ultimately receive something. In particular, they want to ensure there is no possibility of the child(ren) of the first to die receiving nothing.

George and Rose are mindful that financially, Rose has brought more to their marriage. In fact, Stephen has made some comments and expressed concerns about “his” inheritance.

In these circumstances, there are a few ways George and Rose might choose to use Trusts in their Wills.

The most common use of trusts relates to property.

Instead of the whole property passing to the survivor on the first death, George and Rose could sign a Deed of Severance changing their ownership to Tenants-in-Common. This would mean George and Rose would each own a fixed proportion of the property that they could control and gift in their Wills.

Owning as Tenants-in-Common would have the added benefit of being able to reflect any difference in their financial contribution to the purchase. If George contributed 40% of the purchase monies, and Rose 60%, this could be reflected in their respective share and interests under the Tenancy-in-Common.

By owning the property as Tenants-in-Common, George and Rose could include a Trust in their Wills which provides that on the first death, the survivor has the right to live in and enjoy the first to die’s share of the property. This is called a right to reside. This very simple form of Trust can be drafted so that they end when certain events take place. In this way, following Rose’s death, George would continue to own his 40% share of the property, and would have the benefit of living in and enjoying Rose’s 60% rent-free. However, George will never own Rose’s 60%, so he can not sell or mortgage it. Also, in the event George ever required long-term care, only George’s 40% of the property could be included when any financial assessment – Rose’s 60% is safe.

George and Rose could also include provisions that the right to reside is portable. In other words, if the survivor wanted to move, the existing property could be sold, and the proceeds of the sale used to buy another property which would also be held under the same protective Trust which covered the original property. In this way, if, following Rose’s death, George decides he would like to live closer to Paul and Lucy, he could move, and Rose’s money (Stephen’s inheritance) would continue to be protected.

When the trust ends, Rose’s Will can go on to provide that her 60% of the property is to be passed to Stephen. In this way, Stephen’s inheritance is protected (albeit he will have to wait to receive his inheritance until the Trust ends).

George and Rose could also go a step further and grant the survivor a greater benefit under the terms of the Trust by giving a life interest. This would give the survivor a benefit from the Trust for the rest of their life. Not only would the survivor be able to live in and enjoy the first to dies share in the property, but if it is ever sold, the survivor also has the right to enjoy the income generated by the proceeds of the sale until their death.

If George and Rose worry that the life interest might not provide enough for the survivor, and they want the survivor to have a right to capacity also, they could consider including a flexible life interest. Rose might find this interesting given the fact the value of George’s estate is less than her own. Rose advised TSF that she worries if she died first, George might require additional funds for other purposes, such as healthcare perhaps.

Trusts don’t have to be limited to property, and a Will can also include more than one Trust.

George and Rose might also want to sign a Severance of Tenancy and include a Trust relating to their respective half shares in the property. However, they could potentially also protect any or all of the remainder of their estates from future events which might affect their children. These include but are not limited to the following:

• Divorce (this would help address their concerns about Stephen’s fiancé)

• Bankruptcy

• Death

• Means testing

This kind of arrangement would involve George and Rose leaving their estates on the second death to their Trustees (trusted people they appoint in their Wills) with a list of potential beneficiaries (their children and grandchildren) and the discretion to benefit any of the potential beneficiaries as the Trustees see fit. This is a very simplified explanation of a discretionary trust.

It will be important for George and Rose to understand that by including Trusts in their Wills, it will make administering their estate(s) when the time comes more complex and costly. Their Trustees (who they would appoint in their Wills) will need to take legal advice, and there would be action required to ensure the smooth running of the Trust(s) in the years to come. However, George and Rose may decide the additional protections and peace of mind the Trusts offer to them and their loved ones may be worth the extra effort and additional costs.

It is important to understand that there are tax implications to including Trusts in their Wills. This is why we recommend you come in to see us so we can talk you through the options in your particular situation.

This is a very simplified explanation of a common use of Trusts in Wills. If you think this is something you might like to consider, don’t hesitate to get in touch to have a chat about your situation in more detail. Email vijay.singh@thomasflavell.co.uk or call 01455 610747 today.

This blog was written by Sushma Mahey, a Chartered Legal Executive based in our Leamington Spa office. To discuss your personal circumstances, get in touch with Sushma today. She can be reached at sushma.mahey@thomasflavell.co.uk or 01926 887700.

* At the time of writing, how much we have to pay for our care is means tested. Put simply, if you have capital over £23,250, you are responsible to pay all your fees. If you have between £14,250 and £23,250, you will be required to contribute to your care fees. Finally, if you have £14,250 or less, although you will continue to make payments towards your care from your income, the council will pay for your care fees.