A will trust is created within your will to allow you to protect property or assets you hope to pass on to your family.
Trusts are legal entities that allow someone to benefit from an asset without being the legal owner.
You create the trust and appoint a person to manage it - the 'trustee'. The trustee manages the trust on behalf of the 'beneficiaries'.
Establishing a trust can give you an element of control over assets you wouldn't have if you gave them away outright. There can also be tax advantages, but that should never be the main reason for setting one up. In some cases, you could end up paying more tax by putting assets into trust.
Unlike a lifetime trust, a will trust is included in your will, where you set up the conditions and it activates upon your death.
Will trusts are mainly used by couples to deal with a family home if they own it as 'tenants in common'. Rather than leaving their share to each other, they each leave it to a trust, which comes into being on the death of the first partner.
Until recently, will trusts were a common way of saving on inheritance tax (IHT). A couple potentially liable for IHT could split their estate into halves, both below the nil-rate band.
However, since 2007 married couples and civil partners have been able to transfer unused IHT allowance to one another. As such, most couples no longer need to make this type of trust for inheritance tax purposes, though it may be used to ring-fence the deceased spouse's share from care home assessments.
If you use a will trust and your partner dies, you as the surviving spouse retain a right to live in the house. If you need to pay for care, only your share of the home's value will be assessed by the local authority.
The part owned by the trust is not counted. In this way, currently, it's protected from care home costs - but you must bear in mind this can change at any point in the future. Government rules (Charging for Residential Accommodation Guide) suggest that this arrangement will not be contested as 'deliberate deprivation', meaning that you have deliberately split your assets to avoid paying high care-home fees.
Another reason for setting up a will trust is to avoid 'sideways disinheritance'.
This occurs when the first partner dies, leaving children from the marriage who might reasonably expect to inherit some of the family estate in due course. If the surviving partner remarries and fails to make provision for their children in a new will, there's a risk that everything will go to their new spouse instead.
To avoid this situation, you could set up a life interest trust in your Will, allowing your spouse to carry on enjoying the right to live in the property, but leaves your share of the family home to your children when they have passed.
You should seek legal advice before pursuing this option.
Using the online will writing service from Which? is a quick and easy way to write your will. With a range of service levels for you to choose from you can write your will in around an hour and get it reviewed by a one of our wills specialist, for extra piece of mind.
Lifetime trusts are often known as ‘property protection trusts’ or ‘asset protection trusts’. Unlike will trusts, which come into being on your death, lifetime trusts are established straight away.
Your home is gifted to the trust, which allows you to carry on living in it.
It is generally not possible to use a lifetime trust to exempt your home from the local authority's calculations of your assets, when assessing your care home costs.
Anyone considering setting up a lifetime trust, for this reason, should be aware that a local authority may regard this arrangement as 'deliberate deprivation of assets'. If this is the case, they can assess you as if you still owned the property (and refuse to fund your care).
The tax treatment of lifetime trusts is worth considering carefully. Because you gift the house to the trust, it can attract inheritance tax if it's worth more than the nil-rate band (currently £325,000).
Those who transfer their property to a lifetime trust may face an immediate 20% charge on any balance over £325,000 (including gifts made in the previous seven years), while the trustees must submit tax accounts to HMRC. They may have a further tax bill every 10 years, worth 6% of the value over £325,000, plus income tax on any payments from the trust, plus exit charges on assets.
If the trustees sell assets within a trust, these may also be subject to capital gains tax. These may also apply if a trust is liquidated and everything is passed to the trustee.
Capital gains tax will be calculated the same way as it is for individuals, though the annual allowance is smaller - £3,000 in 2023-24. The exception is if the trust has been set up for someone disabled.
It's always important to seek advice before setting up a lifetime trust, as the tax implications can be significant. This is especially true if the beneficiaries of the trust aren't UK residents, as the rules can quickly become even more complicated.
Will trusts and lifetime trusts can be structured in one of two ways:
Usually a discretionary trust also has a letter of wishes for the trustees to consider, which may for example, give one beneficiary the trustees' permission to live in the house or receive the income from investments. The tax treatment of fixed interest trusts is different from discretionary trusts
