For most of us, the reason for making a Will is because we want certainty. We want to be sure that the ones we care for most receive exactly what we want them to inherit from our estate with the minimum of delays and deductions after we have passed on.
A Will is essential to identify what you want to happen but it doesn’t deal with many of the ‘what ifs’ in life that can affect virtually all families and prevent your wishes from being respected or cause your heirs to lose their inheritance.
In addition, a Will does not address the delays and potential costs caused by Probate, prevent generational Inheritance Tax or the potential burden placed on beneficiaries to pay an Inheritance Tax liability prior to receiving their inheritance.
There are many benefits of using a Trust as part of your Legacy Planning that a Simple Will alone wouldn’t provide. These benefits fall broadly into six main categories:
- Prevent Sideways Disinheritance
- Reduce the sometimes adverse effects of inheritance
- Ensure your loved ones inherit at the right time
- Prevent a successful challenge of your legacy wishes
- Avoid the costs and delays of Probate
- Reduce the burden of Inheritance Tax
Preventing Sideways Disinheritance
Including a Trust within your Legacy Planning can prevent sideways disinheritance, protecting your beneficiaries and ensuring that inheritance remains solely with your heirs for generations to come.
What if you or your spouse remarries after becoming widowed?
Should a surviving spouse remarry following the death of their husband or wife, any assets that were owned jointly, or were inherited by the survivor would typically be shared with their new partner.
The inheritance intended for the beneficiaries of the original married couple would therefore be diluted, especially if the new partner has his or her own children. Original beneficiaries can be disinherited completely if the new partner outlives the original spouse.
What if a beneficiary were to become divorced?
Assets left to a beneficiary via a Will are highly likely to form part of the financial settlement with their husband or wife if they were to become divorced. In fact, even whilst you are still living, the inheritance a beneficiary is to receive in the future can be taken into consideration and a portion handed over when it is received.
What if a beneficiary suffered financial hardship?
If you leave your assets to a beneficiary using just a Will, upon death the ownership of those assets transfers to whomever you have left them to.
If the beneficiary is suffering from, or has suffered financial difficulty, their creditors could seize their inheritance.
What if a beneficiary were to die prematurely?
If, for example, you left assets via a Will to a married son who had children and the son were to pass away whilst your grandchildren were still young, your son’s inheritance would typically pass to your daughter-in-law.
If the daughter-in-law were to remarry, those same inherited assets would normally be shared with her new partner. The grandchildren’s inheritance would be diluted further if the new partner had their own children. If the daughter-in-law did not
Reducing the Adverse Effects of Inheritance
What if a beneficiary is, or becomes reliant on state benefits?
If assets are inherited via a Will, they are classed as the beneficiaries’ capital. This will have a dramatic effect on any means tested state benefits and could ultimately lead to the complete loss of the benefits that your heirs may rely on.
If your heirs receive the benefit of their inheritance via a Trust, the capital should not form part of their own estate and therefore should not be considered during means testing.
Inheriting at the Right Time
What if a beneficiary isn’t ready to receive their inheritance?
Sometimes it isn’t always best for a beneficiary to receive their inheritance in one go. If they are young, a vulnerable adult or struggling with drug, alcohol or gambling addictions for example, it might be preferable for their inheritance to be released in stages and under the supervision of a trusted friend, family member or professional.
A Trust provides the flexibility to accommodate this arrangement.
Preventing a Successful Challenge
Who can make a Challenge?
Strictly speaking, anyone can challenge your inheritance wishes and lay claim to part, or all of your estate but not all will be taken seriously.
Those that will be taken seriously are any person who you have excluded but who would have been in line to receive a portion of your estate under Intestacy Laws had you not made a Will. Also, those who claim to have evidence that you made them a promise.
Typically, the grounds for making a challenge would be that someone exerted undue influence on you when making a Will, that you lacked capacity when making your Will and that your Will was old and that your wishes had changed since making it. However, under the ‘‘Provision for Family and Dependants Act 1975’ a person who has either been disinherited entirely or left only ‘unreasonable’ provision, can make a challenge against a person’s estate for greater financial provision.
The greatest danger exists during the period when ownership of assets is in the process of being transferred after you have passed on.
A Trust is without doubt the most robust way to ensure that any challenge would be unsuccessful, not least, because it removes the need for inheritance in its literal sense.
The Trust survives you and the control passes to the Trustees you appointed. There is no need to change the ownership of assets in a Trust and only those named as Beneficiaries are entitled to the benefit of those assets.
Avoid the Need For Probate
Avoiding Probate provides instant access to inheritance & mitigates cost.
Typically, assets left to a beneficiary will have to go through the process of ‘Probate’ before your heirs will receive them. Probate is the legal process of transferring ownership from the deceased to the beneficiary via the Executor. It is a fairly bureaucratic process and usually takes several months to complete.
In addition, it is often the case that a Solicitor or legal professional will be engaged to complete Probate and it would be reasonable to expect their fees to be in the region of 2% of the Estate value including any property such as the family home.
Furthermore, beneficiaries cannot access their inheritance until the Grant of Probate has been acquired but, they may have to pay certain bills such as the probate fees and funeral costs to name but two.
As a Trust survives even after you have passed on, those assets within the Trust will not be included within the probate process and therefore the beneficiaries will receive the benefit as you have stipulated immediately and without cost.
The Burden of Dealing with Inheritance Tax
How will Inheritance Tax be paid?
If the value of your estate exceeds the Inheritance Tax threshold, HMRC will expect that any tax due is paid before they will allow the Grant of Probate. In other words, the tax has to be paid before your beneficiaries receive their inheritance.
If liquid funds are not available and the Inheritance Liability is not paid within 6 months of the deceased’s death, interest will be charged.
HMRC will often allow the tax liability to be paid in instalments over a period of time (often 10 years). However, that agreement has to be maintained regardless of whether funds have been released from assets that need to be sold.
Assets placed into Trust won’t necessarily avoid Inheritance Tax but, they are not subject to Probate and the Trust beneficiaries can access them immediately.
Mitigating generational Inheritance Tax
It is not unusual for assets to create an Inheritance Tax liability more than once.
Assets that exceed the Inheritance Tax threshold will be subject to taxation on the death of the owner. Once the assets have been inherited, they will form part of the beneficiary’s estate. If the value of their own estate, or with the addition of their inheritance, exceeds the Inheritance Tax threshold, the inherited wealth will be subject to Inheritance Tax again along with their own assets once they have passed on.
Leaving assets to someone via a Trust can prevent those assets ever forming part of the beneficiary’s estate, therefore avoiding a next generation Inheritance Tax.
Extracts from HMRC Website Sept 2014:
“You must pay some or all of any Inheritance Tax due before you can get a Grant of Probate.”
“In most cases, you must pay Inheritance Tax within 6 months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding.”
“You can pay in yearly installments over 10 years if the value of the estate is tied up in property such as a house”