Testamentary trust wills
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What is a testamentary trust will?
A testamentary trust will is a will that creates a trust upon your death. The trust allows you to specify how and when your assets are given out to beneficiaries - often over a period of time rather than in one lump sum.
The trust only comes into effect after your death, which means your wishes for your estate can be followed in a controlled and structured way, providing security and clarity for your loved ones.
In the UK, testamentary trusts are often used to protect assets for beneficiaries who may not be able to manage them on their own, such as children, vulnerable adults, or those with financial difficulties.
The trust is managed by a trustee who is responsible for overseeing the assets and distributing them in line with your wishes.
Why people arrange testamentary trust wills
From managing assets to protecting family, people choose a will of this kind for a variety of key reasons.
Protecting children
One of the most common reasons for setting up a testamentary trust will is to protect minor children. When you pass away, your children may be too young to manage an inheritance. The trust makes sure their inheritance is held until they reach a certain age, or other conditions are met, to protect them from financial problems.
Get your quoteVulnerable beneficiaries
If you have beneficiaries who may be vulnerable due to disability, addiction, or poor finances, a testamentary trust can keep their inheritance safe. The trustee can oversee the assets and funds, making sure they're used to benefit the beneficiary without the risk of misuse.
Get your quoteTax and asset protection
A testamentary trust can also be an effective way to minimise inheritance tax (IHT) and protect assets from potential claims from creditors. With your assets held in a trust, it may be possible to reduce taxes on your estate, depending on the type of trust you set up. This strategy is particularly useful for larger estates.
Get your quoteControlling the timing
You may want to control how and when your beneficiaries receive their inheritance. A testamentary trust allows you to choose when assets should be distributed - when they reach a specified age, achieve a milestone, or at yearly intervals. This could align with your long-term goals for your beneficiaries.
Get your quotePreserving wealth
A testamentary trust will can protect family wealth for future generations. By placing assets in a trust, you can make sure they're preserved for your children, grandchildren, or other descendants, and that the wealth is passed down as you would like. This can help avoid disputes and prevent wealth from eroding too quickly.
Get your quoteFuture flexibility
Unlike a will, a testamentary trust can be designed to adapt to future changes. For example, if a beneficiary gets married, has children, or faces financial hardship, the trust terms can allow for adjustments in how their inheritance is paid out or managed, giving them ongoing protection and flexibility.
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Testamentary trust wills vs. living trusts
The key difference lies in probate and timing - and the choice depends on your goals for your assets.
Testamentary trust wills
A testamentary trust is created as part of your will and takes effect only upon your death. It allows you to distribute assets according to specific conditions, but it must go through the probate process before the trust is set up. Even if your instructions make the process simpler than a will, probate can still take months to complete.
Living trusts
A living trust is created during your lifetime and allows assets to be transferred directly into the trust while you're still alive. The trust takes effect immediately, and since the assets are already owned by the trust, they typically bypass probate altogether. This can be more efficient but it means more active management during your lifetime.
Testamentary trust wills pros and cons
Advantages
- Clear instructions: Ensures that your wishes are clearly laid out and followed after your death.
- Protect beneficiaries: Provides a way to protect vulnerable beneficiaries, such as minors or those with mental or financial challenges.
- Tax benefits: Can offer tax advantages, potentially reducing the inheritance tax burden on your estate.
Disadvantages
- Complex admin: Can require ongoing admin work, which can be time-consuming for the trustee.
- Potential costs: Can incur legal costs and admin fees, particularly if the estate is large or complex.
- Lengthy probate: Must go through probate to take effect, potentially delaying access for your beneficiaries.
Should I take out a testamentary trust will?
If you have minor children, vulnerable beneficiaries, or a large estate that you want to protect from high taxes or mishandling, a testamentary trust can be a smart and effective tool. If your estate is fairly simple, or you don't have concerns about your beneficiaries or how they'll receive your assets, a simpler will may suffice. Ultimately, it’s important to consult with a legal professional to decide which kind of will would suit you best.
Types of testamentary trusts
1. Discretionary trust
A discretionary trust gives your trustee the power to decide how and when to distribute assets among your beneficiaries. This is particularly useful if the beneficiaries’ needs may change over time or if you have concerns about their ability to manage their finances.
Your trustee has the power to use the trust’s assets in the best interests of your beneficiaries.
2. Children's trust
A children’s trust is specifically designed to hold assets for minor children. The assets are managed by a trustee until the children reach a certain age.
This type of trust ensures that children are provided for, but the funds aren't released until they're old enough to manage the inheritance responsibly.
3. Interest in possession trust
In an interest in possession (IIP) trust, your beneficiaries are entitled to receive income generated by the trust's assets, but the assets and capital remain in the trust. If there's property in the trust, they may be entitled to live in it rent-free.
This type of trust is often used in second marriages. It could allow the surviving spouse to benefit from income generated by assets, while keeping the capital for children from a previous marriage.
4. A vulnerable beneficiary trust
This type of trust is designed to protect assets for beneficiaries who may be vulnerable, perhaps due to a physical or mental disability. With this kind of trust in place, the beneficiary can receive funds while still being eligible for state benefits.
Trustees manage the assets of this trust and make sure they're used for the beneficiary’s wellbeing.
5. Charitable trust
A charitable trust allows you to allocate part of your estate to a charity. The trust specifies which charity or charities will benefit from your assets. It can also provide tax benefits by reducing the taxable value of your estate.
6. Testamentary family trust
A family assets trust is designed to protect family wealth and provide for future generations. It can ensure that family members inherit according to specific terms, and it can also offer protection against claims by third parties, such as creditors or ex-spouses.
This trust can be used to preserve wealth and manage assets for generations to come.
How to arrange the right testamentary trust
To help guide you through choosing the right testamentary trust, here’s a checklist to consider when searching and arranging.
Our expert says:
‘’A testamentary trust will lets you control your assets even after you pass away. It means your estate is a separate legal entity to your beneficiaries, and you may be able to protect them from too much tax and the claims of creditors. That's a smart legal arrangement that can leave a lasting legacy.”
Frequently Asked Questions
Can a testamentary trust be contested?
Yes, a beneficiary or interested party can challenge the trust will if they believe it was created under duress or undue influence, or without the testator's full mental capacity.
Can I change the beneficiaries of a testamentary trust?
The testamentary trust "definition" names the parties: a grantor, a trustee, and the beneficiary. You can revise your will at any time during your life, although any changes would need to be made through a new will or codicil, which will override the previous instructions.
How does a testamentary trust help reduce inheritance tax?
A testamentary trust can be an effective way to reduce inheritance tax (IHT), but this depends on the type of trust and how it's structured. In the UK, assets transferred to a charitable trust upon your death are exempt from IHT. Certain other types of trust can offer tax advantages, e.g. those providing assets to vulnerable beneficiaries.
What happens to the trust if the trustee dies?
Your trust document should ideally include provisions for a successor trustee, who will take over the managing the trust if the trustee dies. It’s important to name a successor trustee when setting up the trust to avoid any gaps in management. If a successor trustee isn’t named, the beneficiaries or the court may need to appoint a new one, which could delay the process of receiving assets.
How can I ensure my testamentary trust is administered properly?
To ensure your trust is properly handled, you should choose a reliable and competent trustee. Their role is to manage the trust’s assets, follow your instructions, and act in the best interests of the beneficiaries. You can appoint a professional trustee, such as a solicitor, accountant, or bank, or you can choose a trusted family member or friend. A professional trustee is often recommended for complex trusts or large estates, while a someone close to you, who understands your wishes, can also be a good choice.
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