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When should I consider incorporating a testamentary trust into my Will?

A picture of a pen resting on a Will prompts the question, "When should I consider incorporating a testamentary trust into my Will?"

When you make a Will, you have a choice: make a simple Will or one that incorporates a Trust. So you might ask, “When should I consider incorporating a testamentary trust into my Will?”

Before you read on, it’s a good idea to understand the basics of trusts, which are explained in this longer article: Trusts in estate planning.

Wills containing trusts are typically more expensive then basic Wills and can provide several advantages. But what exactly is a testamentary trust?

The word “testementary” simply means “relating to a Will”, so a testamentary trust is just one that is written into your Will. And since it is contained in a Will – a document that only comes into effect after you die – the trust in a Will is not activated until then.

So how is this different from a simple Will? The difference is that a simple Will gifts assets directly to beneficiaries such as your spouse, partner or children. Whereas a trust provides some form of protection.

But as mentioned above, this protection can only ever come into force after your death. That’s because a Will is only used after death and the trust is in the Will.

So if you’re wondering, “When should I consider incorporating a testamentary trust into my Will?”, the answer is to protect assets at two crucial times:

  • When you die
  • For couples, when your spouse/partner dies

Protect assets on your death

It’s impossible to predict when you’ll pass away. And because of that, your death may come at a bad time for a beneficiary of your Will.

For example, imagine that one of your children is going through a divorce at the time of your death. They will inherit from your Will but, soon after that, they could lose 50% of their inheritance in a divorce settlement.

Likewise, consider a beneficiary who is facing bankruptcy. This could be a result of poor lifestyle choices or perhaps the failure of a business. Either way, their inheritance could go straight to their creditors.

Even if neither of these things happen, one of your children may not be good at managing money. They could spend it on things that could harm them, or false friends may take advantage of their generosity.

If one of your children is vulnerable, perhaps severely disabled, they may need someone to manage money on their behalf. If they’re claiming means-tested benefits, inheriting a large sum could see them lose the income they used to enjoy.

None of these issues may apply to your family members right now. But they might in future. Even if your children are wealthy and successful and enjoy happy marriages, having a trust in your Will could still be an advantage.

If your children have a lot of money and own property, inheriting from you could push their estates over the threshold for paying inheritance tax at 40%. Your grandchildren would lose out because more money would be lost to the government in tax when your children pass away.

And finally, what if your children are living abroad when you die? They could be resident in a country where the people who inherit have to pay tax, not just the person who has died.

If so, there could be two lots of tax to pay: inheritance tax paid on your estate in the UK and also tax payable by a beneficiary who has inherited from you whilst living abroad.

Right to reside

If you have a spouse or partner or someone else who lives with you, you could consider a trust that gives them the right to reside in your property. Typically, a spouse is given the right to live in a property for life.

The reason for doing this is if you ultimately want to pass your property to other people. This could be if you’ve married for a second time, for example, and have children from previous relationships.

A trust can ensure that your property, or your share of it, is held in trust. Your spouse or partner could remarry (which revokes their own Will) or change their Will in future. But the property that your Will placed in trust are secure for future generations.

Protect assets on your spouse or partner’s death

If you have a spouse or partner who survives you, they will pass away at some stage. So what happens then?

With a basic Will, all their assets will pass directly to the beneficiaries of their Will. If you both made basic Wills, they probably inherited all, or most, of your assets as well. So potentially all of your combined assets will go direct to your beneficiaries.

For all the reasons mentioned above, this may not be a good time for your children. They could be going through a divorce, facing bankruptcy, living abroad or receiving benefits.

Only this time, the potential problem could be even larger if they’re inheriting two lots of assets instead of one. So the answer could be trusts that come into play after the death of both spouses. You can think of this as being like an “air bag” that protects you in the event of a crash.

Summary

The answer to, “When should I consider incorporating a testamentary trust into my Will?” is really whenever you’re making a Will. Provided, that is, that you have assets worth protecting and you want to ensure they go to your loved ones. In my opinion, Wills with Trusts are better than simple Wills. For couples, simple Wills are merely an elaborate form of wishes and you leave a lot to chance. In my experience, Wills with Trusts can protect assets after your death or after the death of your spouse/partner, or both.

The information contained in these articles is for general interest purposes only. We take every precaution to ensure that the information is correct at the time of publishing but errors can occur. Given the changing nature of laws, rules and regulations, there may be omissions or inaccuracies in the information. Bristol Wills & Estate Planning Ltd is not responsible for any errors or omissions or for any results obtained from the use of this information. You should never rely on the information in these articles as a substitute for professional legal advice, whether from Bristol Wills & Estate Planning or any other legal service or professional.

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