Estate planning is far more than paperwork—it’s about safeguarding your family, your wishes, and your legacy. Trusts are powerful tools, but they’re often misunderstood, and many guides miss the real-life issues families face. This article explores will trusts and living trusts in England and Wales, with practical examples and insights to help you make informed decisions.
Will Trusts: More Than Just a Safety Net
A will trust is set up in your will and only comes into force after your death. It’s not just for the wealthy—many families use will trusts to protect children, vulnerable adults, or to manage complicated family situations.
Nuanced Uses:
Blended Families: If you have children from previous relationships, a life interest trust can ensure your current partner is cared for, but your children still inherit later. This avoids “sideways disinheritance,” where assets unintentionally pass outside your bloodline.
Protecting Vulnerable Beneficiaries: If a beneficiary struggles with addiction, debt, or disability, a discretionary trust lets trustees provide support without handing over a lump sum that could be misused or claimed by creditors.
Inheritance Tax Planning: Will trusts can help reduce inheritance tax, but only if structured carefully. For example, a nil-rate band discretionary trust can use your tax-free allowance, but recent changes mean this is less effective than it once was.
Trustee Selection: Trustees should be people you trust to act fairly and wisely. Family members may know your wishes, but professional trustees (like accountants) can offer impartiality and expertise. You can appoint both. Trustees must act unanimously unless your trust says otherwise. If they disagree, decisions can stall, so consider personalities and relationships.
Disputes and Challenges: If a beneficiary feels unfairly treated, they can apply to court under the Inheritance (Provision for Family and Dependants) Act 1975. This is common in blended families or where expectations aren’t clear. Trustees can be removed by the court if they act improperly, as in Schmidt v Rosewood Trust Ltd [2003] UKPC 26.
Living Trusts: Control and Continuity
Living trusts are less common in England and Wales, but they can be invaluable in certain situations.
Nuanced Uses:
Incapacity Planning: If you’re worried about dementia or sudden illness, a living trust lets you appoint someone to manage your assets without the delays and costs of a deputyship application. This is more flexible than a lasting power of attorney, which only covers financial decisions.
Business Owners: If you own a family business, a living trust can ensure continuity if you’re incapacitated, avoiding disruption and disputes.
Privacy: Unlike wills, living trusts aren’t public documents. If you want to keep your affairs private, this is a key advantage.
Practical Considerations: Setting up a living trust means transferring assets now, which can trigger stamp duty or capital gains tax. For example, putting a second property into a trust may mean paying stamp duty at the time of transfer. Banks and financial institutions sometimes resist dealing with trusts, so check in advance whether your assets can be transferred smoothly.
Trustee Powers and Duties: Trustees must keep records, file tax returns, and act in the best interests of all beneficiaries. If they fail, beneficiaries can challenge them, but this can be costly and stressful. Trustees can be held personally liable for losses caused by negligence or breach of duty.
Key Differences Between Will Trusts and Living Trusts
Timing: Will trusts start after death; living trusts operate during your lifetime.
Probate: Living trusts can help avoid probate, but in England and Wales, probate is often simpler than in other countries.
Control: Living trusts allow you to manage assets while alive; will trusts only take effect after death.
Tax: Different trusts have different inheritance tax implications. For example, discretionary trusts may be subject to periodic charges (Inheritance Tax Act 1984).
Trustee Duties: Trustees must act in accordance with the law and your instructions. If they fail, beneficiaries can challenge them in court (Schmidt v Rosewood Trust Ltd [2003] UKPC 26).
Three Real-Life Examples
Blended Family Protection:
After remarrying, Tom wants his wife to live in their home for life, but wants his children from his first marriage to inherit the property eventually. He sets up a life interest will trust. The trustees ensure his wife’s needs are met, but the children’s inheritance is protected.Supporting a Vulnerable Adult:
Jane’s son has learning disabilities and receives means-tested benefits. She sets up a discretionary will trust, so trustees can pay for extras (like holidays or equipment) without affecting his benefits. The trust is carefully worded to avoid “deprivation of assets” rules.Business Continuity Through Living Trust:
Raj owns a small business. He sets up a living trust and transfers his shares into it. If he’s incapacitated, his daughter (the successor trustee) can run the business, pay staff, and make decisions without waiting for court approval.
Pitfalls
Family Dynamics: Trusts can cause tension. If one child is a trustee and another is a beneficiary, disputes can arise. Consider appointing a neutral trustee or setting clear rules for decision-making.
Tax Traps: Discretionary trusts face a 10-year periodic charge (up to 6% of the value over the nil-rate band). Life interest trusts are taxed as if the beneficiary owns the asset, which can affect their own tax position.
Changing Circumstances: Trusts are hard to change once set up. If family relationships shift, or a beneficiary’s needs change, trustees may be limited in what they can do.
Costs: Professional trustees charge annual fees. Even family trustees may need legal or financial advice, which can eat into the trust fund.
Setting Up a Trust: Step-by-Step
Decide what you want to achieve (protection, control, tax planning, privacy).
Choose trustees who are reliable, impartial, and able to work together.
Draft a trust document with clear instructions, powers, and dispute resolution mechanisms.
For living trusts, transfer assets now and notify banks, insurers, and HMRC.
For will trusts, ensure your will is up to date and reflects your wishes.
Keep beneficiaries informed to avoid surprises and disputes.
Risks and Considerations
Trustees must act in the best interests of beneficiaries. If they fail, beneficiaries can apply to court for removal or compensation. Trusts can be challenged if the will is disputed or if there are concerns about capacity or undue influence. Ongoing management can be costly, especially for discretionary trusts. Tax rules are complex and change frequently. Some trusts face periodic charges or higher rates.
Conclusion
Trusts are not just legal tools—they’re about family, fairness, and foresight. The right trust can protect vulnerable loved ones, manage family tensions, and ensure your wishes are respected. But they require careful thought, clear instructions, and trustees who understand their responsibilities. Take time to familiarise yourself with the options, consider the real-life impact, and don’t be afraid to ask questions or seek out detailed information. For most people, a well-drafted will with a suitable trust is enough to protect loved ones and ensure your wishes are respected.