Amy Lane, Solicitor at Thomson Snell & Passmore joins us again to answer another Will related question.
Duncan Orr, Director and Chartered Wealth Manager at Swindells, said, “Amy, last time we talked about Deed of Variation, this time it’s about the reservations a client has about leaving all of their wealth and assets to their children, more specifically, when they have a particular concern about the strength of one of their children’s marriage and also the spendthrift nature of their spouse.
What should they consider including within their Will to cover this?”
Amy answers:
Surprisingly, this comes up fairly frequently when advising clients about their Wills. There are four ways of providing for your children under the terms of your Will: –
- Leaving them an absolute entitlement, which means they will inherit your estate outright once the estate has been finalised;
- Leaving them a contingent interest, which is contingent on them reaching a particular age;
- Leaving them an immediate interest in the income of your estate, with the capital held at the discretion of the trustees (and I talk about trustees in more detail below); or
- Leaving your estate into a Discretionary Trust, which means the trustees of your Will have discretion as to when your children inherit and by how much.
It is the fourth option, namely a Discretionary Will Trust, which would probably be the most appropriate for your client’s circumstances.
Duncan: What is a Discretionary Trust?
Amy: A Discretionary Trust can be set up during your lifetime, or under the terms of your Will.
They are called a Discretionary Trust because no one beneficiary has a fixed entitlement. The trustees, who are usually (but not always) the same as the executors of your Will, have discretion as to who should benefit, by how much and when. The trustees are given a power within the terms of the Will which enables them to pay both the capital and/or the income to any of the named beneficiaries.
A Discretionary Trust will enable your estate to be distributed in accordance with your client’s wishes, as normally the trustees are guided by an accompanying letter of wishes. The letter of wishes is a separate, private document between your client and the trustees, and unless the children of your client are trustees, they would not be entitled to see the letter. As such, your client could specify their concerns about the spendthrift nature of their in-law and how they envisage provision for their child should be made.
Duncan: What does this involve and why would I do this?
Amy: Firstly, it would involve considering your client’s circumstances and updating their Will. As I said above, the trust is usually contained within the Will itself, so it would require an update to your client’s existing Will (assuming they have one).
The main reasons for having a Discretionary Trust are:
1. Your client may not have decided who should eventually take the assets in their estate or in what proportions. By leaving their estate into a Discretionary Will Trust, they can change their letter of wishes as many times as they like before they die, without always needing to update their Will, which provides flexibility.
2. Your client may not want their detailed wishes regarding their estate to be public knowledge after their death. When somebody dies, and once a Grant of Probate is obtained in their estate, their Will becomes a public document and can be seen by anyone who chooses to obtain a copy. However, the letter of wishes is strictly private and therefore their detailed wishes would remain unknown to the beneficiaries. This can be particularly useful when providing differently for children to avoid any disharmony and arguments after someone has died.
3. Discretionary Trusts can also be useful to provide flexibility if someone dies before being able to review their Will, meaning adjustments can be made by the trustees in order to give effect to your client’s wishes.
Duncan: Who should I have as my trustees?
Amy: The key with your trustees, and I say this to many of my clients, is to trust them (the clue is in the title!). Being a trustee involves taking on very wide powers and it is vital that the trustees can be relied upon to safeguard the assets of the trust, act in the best interests of the beneficiaries and to give effect to your wishes.
In a situation where a client is making different provision for their children, it can often be useful to have a neutral trustee such as a family friend or even a professional trustee to help navigate any decision-making process.
Duncan: Are there any ongoing tax consequences of having a Discretionary Trust in my Will?
Amy: Yes. There are three taxes which you need to be mindful of, namely: –
- Inheritance Tax (IHT);
- Capital Gains Tax (CGT) (which may be changed following an announcement on 11 November); and
- Income Tax.
Trust tax can be complicated, and I could have a whole Q&A session with you on trust tax alone, but what I would say is that the tax charges that arise really depend on the assets in the trust, how these are administered and how the trust is structured.
Duncan: Can you give me an example of when this has worked in practice?
Amy: Yes. Incidentally, I had a situation not to dissimilar to your client’s recently. They had two children, a son and a daughter. They had no concerns about their daughter, but their son had recently got married and their daughter-in-law had turned into what they called a “Bridezilla”. The wedding cost tens of thousands of pounds and, as a result of their daughter-in-law’s behaviour, they had concerns about leaving money outright to their son all the while that he was married to her, although they acknowledged there would come a point in time where they would have to accept her, even if her behaviour continued.
On my advice, they structured their Wills so that one-half of their estate on second death went to their daughter, and the other half went into a Discretionary Trust for the benefit of their son and his descendants. There was an accompanying letter of wishes which said distributions were to be made to their son at certain junctures in his life. The clients are aware that they can change their letters of wishes at any time, should relations with their daughter-in-law improve.
In conclusion, a Discretionary Will Trust may be suitable for someone who wants to leave assets for the future benefit of a number of potential beneficiaries, with maximum flexibility.
Should you have a questions regarding your Will or other financial matters then please get in touch.
