Setting up a Trust for beneficiaries in your Will

If your family’s circumstances change or you want to safeguard any inheritance you might consider having your Will redrafted to include a Trust.

You might consider this if, say, your son is your sole beneficiary but marries somebody you’re not keen on. To protect any inheritance, you could set up a Trust to ensure assets pass directly to your grandchildren on his death, rather than his spouse.

Other scenarios include, for example, wanting to protect assets for those who are too young to handle their affairs. 

Or you may want to protect assets from children with problems, such as gambling or drug addictions.

A Trust is a legal arrangement that allows assets such as property to be looked after for the beneficiaries in your Will. Assets are looked after by a third party, known as the ‘Trustee’, to avoid anything passing to someone you don’t want to inherit.

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Types of trust

There are two types of trust you can use:

Life Interest Trusts

Using these, any assets are held on behalf of a beneficiary for their lifetime and then passed onto another on their death. 

For example, income may be received from an investment pot that’s inherited, but the capital sum remains protected.

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Discretionary Trusts

These are more flexible, and as their name suggests give the Trustee the discretion to apportion inheritance depending on circumstances. They can choose who benefits and by how much.

In the scenario above, money could be placed in Trust for the Trustee to pass to your son if and when the time is right.

If your worries about his spouse are confirmed, for example, the money could be passed directly to your grandchildren.

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Tax implications

Using a Life Interest Trust sees the value of these assets fall under the beneficiary’s estate for inheritance tax (IHT) purposes. This is the case even though the capital value isn’t accessible during their lifetime.

If the value of their estate is close to or above the nil rate band before the money is passed on, you may want to consider a Discretionary Trust instead to avoid IHT. However, beware that there is more risk involved in terms of the potential for the Trustee to go against your wishes after your death.

It’s vital to choose someone you have complete faith in as Trustee. You could add further guidance for them in a letter of wishes, which is stored with your Will. While this isn’t a legal document, it could give you peace of mind that you have set out what you want clearly. 

For more tips and useful information, browse our money articles.