Wills and Trusts

A Will is a legal document that sets out how an individual (the testator or testatrix) wishes their estate—comprising assets such as property, money, investments, and personal belongings—to be distributed after their death. It also allows the testator to appoint executors, guardians for minor children, and specify other wishes, such as funeral arrangements.

• Purpose:
  • A Will ensures that the testator’s assets are distributed according to their wishes rather than under the UK’s intestacy rules, which apply when       someone dies without a valid Will.
  • It provides clarity and reduces potential disputes among beneficiaries.
  • It allows the testator to make provisions for specific individuals, charities, or organisations.
• Legal Requirements for a Valid Will (Under UK Law):
  • The testator must be at least 18 years old and have mental capacity (i.e., understand the implications of making a Will).
  • The Will must be made voluntarily, without coercion or undue influence.
  • It must be in writing (handwritten or typed).
  • The testator must sign the Will in the presence of two independent witnesses (who are not beneficiaries or spouses of beneficiaries), and the       witnesses must also sign the document.
  • Under the Wills Act 1837, these formalities must be followed for the Will to be legally binding.
• Key Components of a Will:
  • Appointment of Executors: The testator nominates one or more executors to administer the estate, ensuring assets are distributed as specified.
  • Beneficiaries: The individuals, organisations, or charities who will receive the estate’s assets.
  • Distribution of Assets: Specific gifts (e.g., “I leave my jewellery to my daughter”) or the division of the residuary estate (what remains after specific       gifts and debts are paid).
  • Guardianship: For testators with children under 18, a Will can appoint legal guardians.
  • Funeral Wishes: Non-binding instructions about burial, cremation, or memorial preferences.
• Types of Wills:
  • Single Will: For an individual, outlining their personal wishes.
  • Mirror Will: Commonly used by couples (e.g., spouses or civil partners), where each partner’s Will mirrors the other’s, typically leaving assets to each       other and then to children or other beneficiaries.
  • Joint Will: A single Will for two people (less common), binding both parties, and cannot be changed without mutual consent.
  • Living Will: Not a Will in the traditional sense but a document (also called an advance decision) specifying medical treatment preferences if the       individual loses capacity.
• Advantages of a Will:
  • Ensures assets are distributed according to the testator’s wishes.
  • Reduces the risk of family disputes.
  • Allows tax planning to minimise Inheritance Tax (IHT), which is currently levied at 40% on estates above the £325,000 nil-rate band (or £500,000 if the residence nil-rate band applies for homeowners passing their home to direct descendants).
  • Provides for unmarried partners, stepchildren, or others not covered by intestacy rules.
• Limitations:
  • A Will only takes effect after death, so it cannot manage assets during the testator’s lifetime.
  • It can be challenged (e.g., under the Inheritance (Provision for Family and Dependants) Act 1975 if reasonable financial provision is not made for       certain dependents).
  • If not properly drafted or witnessed, it may be invalid, leading to intestacy.
• Updating and Revoking a Will:
  • A Will can be updated via a codicil (a formal amendment) or by creating a new Will.
  • Marriage or civil partnership automatically revokes a Will unless it was made “in contemplation of marriage.”
  • Divorce does not revoke a Will but treats the former spouse as if they predeceased the testator for inheritance purposes.
• Probate:
  • After death, the executor must obtain a Grant of Probate from the Probate Registry to administer the estate. This involves valuing the estate,       paying debts and IHT, and distributing assets to beneficiaries.
  • Probate can be time-consuming and costly, especially for complex estates.

A Trust is a legal arrangement where one or more individuals (the trustees) hold and manage assets for the benefit of others (the beneficiaries). Trusts can be set up during a person’s lifetime (living trusts) or through a Will (testamentary trusts) to take effect after death. They are highly flexible and used for various purposes, including asset protection, tax planning, and providing for vulnerable beneficiaries.

Key Features of a Trust

• Structure of a Trust:
  • Settlor: The person who creates the trust and transfers assets into it.
  • Trustees: Individuals or professionals (e.g., solicitors or trust companies) responsible for managing the trust in accordance with its terms and for       the benefit of the beneficiaries.
  • Beneficiaries: The individuals, groups, or organisations entitled to benefit from the trust’s assets or income.
  • Trust Property: The assets placed in the trust, such as cash, property, shares, or other investments.
• Types of Trusts in the UK:
  • Bare Trust:
    • The simplest form, where the beneficiary has an immediate and absolute right to the trust’s assets and income.
    • Commonly used for minors, with assets held by trustees until the beneficiary reaches 18.
    • Example: A grandparent sets up a bare trust to hold £10,000 for a grandchild, accessible at 18.
  • Discretionary Trust:
    • Trustees have discretion over how and when to distribute assets or income to beneficiaries.
    • Useful for protecting assets or providing for vulnerable beneficiaries (e.g., those with disabilities or financial irresponsibility).
    • Example: A settlor creates a discretionary trust to support their children, with trustees deciding how much each child receives based on need.
  • Interest in Possession Trust:
    • A beneficiary (the “life tenant”) is entitled to the income generated by the trust (e.g., rent from a property) during their lifetime, but the        capital passes to other beneficiaries (the “remaindermen”) upon their death.
    • Example: A spouse receives income from a trust during their lifetime, with the capital passing to children afterward.
  • Accumulation and Maintenance Trust:
    • Designed for young beneficiaries, where income is accumulated until a specified age (e.g., 25), after which the trust may become a bare trust or distribute assets.
    • Often used for educational or maintenance purposes.
  • Protective Trust:
    • Protects assets for a beneficiary who may be financially vulnerable (e.g., at risk of bankruptcy), by limiting their access to the trust’s capital.
  • Charitable Trust:
    • Set up to benefit a charitable cause, with potential tax exemptions.
• How Trusts Are Created:
  • During Lifetime: The settlor transfers assets into the trust via a trust deed, a legal document outlining the trust’s terms, trustees, and beneficiaries.
  • Through a Will: A testamentary trust is established upon the testator’s death, with the Will specifying the trust’s terms.
  • Assets transferred into a trust during the settlor’s lifetime may be subject to Capital Gains Tax (CGT) or Inheritance Tax (IHT) depending on the trust type and value.
• Advantages of Trusts:
  • Asset Protection: Trusts can shield assets from creditors, divorce settlements, or irresponsible beneficiaries.
  • Tax Planning: Trusts can reduce IHT liability, especially for high-net-worth individuals. For example, transferring assets into a trust during the       settlor’s lifetime may remove them from the estate for IHT purposes after seven years (a potentially exempt transfer).
  • Control: The settlor can specify how and when beneficiaries receive assets, providing flexibility for complex family situations.
  • Privacy: Unlike Wills, which become public during probate, trusts remain private.
  • Support for Vulnerable Beneficiaries: Trusts can provide for minors, individuals with disabilities, or those unable to manage finances.
• Taxation of Trusts:
  • Inheritance Tax:
    • Lifetime transfers into most trusts are subject to an immediate IHT charge of 20% on amounts above the £325,000 nil-rate band.
    • Trusts may also face periodic charges (every 10 years) and exit charges when assets are distributed.
  • Capital Gains Tax:
    • Trustees pay CGT on gains when assets are sold or transferred, with an annual exempt amount (e.g., £3,000 for 2025/26).
  • Income Tax:
    • Trust income is taxed at rates up to 45% (or 39.35% for dividends), though beneficiaries may receive tax credits when income is distributed.
  • Professional advice is essential due to complex tax rules.
• Limitations:
  • Setting up and managing a trust can be costly, involving legal and trustee fees.
  • Trustees have significant responsibilities and must act in the beneficiaries’ best interests, potentially leading to disputes.
  • Tax rules for trusts are complex and may not always result in savings.
  • Trusts are irrevocable in many cases, meaning the settlor cannot easily reclaim assets.
• Trustee Duties:
  • Act impartially and in the best interests of all beneficiaries.
  • Manage trust assets prudently, including investing responsibly.
  • Keep accurate records and provide accounts to beneficiaries.
  • Comply with tax obligations and trust law.

If you have a need for a WIll or Trust Deed, please contact us on 0800 061 46 49 or email ask@phillipscapital.info to discuss your options.