Why Set up a Lifetime Trust?

This blog explains why it is so beneficial to have a Lifetime Trust instead of a Will Trust.

Why do Solicitors Usually recommend a Will Trust?

Usually, a Will Trust is set up and created by a Will and is usually a Discretionary Trust. The benefit of this is that it means the person's entire assets fall into the Trust as opposed to going directly to their beneficiaries on death. The Trust will typically last 125 years from inception. Here, the Trust can make loans from the Trust to the beneficiary. This will protect the assets, for example, in the event that your child gets divorced.

What is the Difference Between Will Trusts and Lifetime Trusts?

Both types of Trusts are Discretionary Trusts. However, the main difference is that a Will Trust is set up on death and the Settlement (items that go into the Trust) are the assets that are left on death. By contrast, Lifetime Trusts are set up during lifetime, and the Settlement occurs immediately. The Settlement can be as little as £10, and the rest of the assets pass into the Trust upon death.

A Lifetime Trust allows you to gift assets during your lifetime. Rather than giving money directly to your children, which contains the risk of losing half the money in a divorce scenario, the Trust will lend the money to your children which means that the assets are protected.

Downsizing Your Home

You could decide to downsize your house so that you would have money in your late seventies to gift out to your children. Here, with a Lifetime Trust, if you were to live for seven years after making a gift into Trust, you could then use your nil-rate band allowance more than once.

Deathbed Planning

Lifetime Trusts also have another advantage which is particularly useful for the wealthy. Imagine that your spouse has already died and you are suddenly taken very ill. As the Trust already exists, you can gift some money into the Trust immediately. If, as a result of this, the estate value drops below £2 million, that means that the residential nil-rate band is fully available. This would up to £140,000 in inheritance tax. So although that death bed gift would fail as gift into a Trust for inheritance tax purposes, it would still reinstate the residential nil-rate band, thus saving inheritance tax.

Certainty

The main advantage of using a Lifetime Trust is that it uses the existing rules. This means that you know and understand what the rules are when you place your £10 in. This also means that if you create a Trust during your lifetime, you have a much higher level of certainty on the rules applied than one created upon your death which could be 20 years later (allowing time for the rules to change).

Like all matters related to Estate Planning and inheritance tax, experienced advice is essential.

Call us if you require any help.