Flexible Will Trusts: The Pros and Cons
Flexible Will Trusts, also referred to as Discretionary Will Trusts have been relied on for many years as a way of generally protecting family wealth against 3rd parties while, in some cases preventing multi-generational inheritance tax.
The recent introduction of the residential nil rate band (RNRB) and its various exceptions (discussed in our previous blogpost), have cast some doubt on whether these trusts are still a good idea for wealthy clients.
Flexible will trusts are still a very useful tool in estate planning strategies and most of the “cons” are easily remedied as the law currently stands.
Here are the pros and cons of this type of will:
1. They provide executors with the flexibility to be able to arrange distribution of your estate in the most tax effective way considering the relevant tax law at that time. In simple words the law allows trustees to effectively re-write the will for inheritance tax purposes.
In larger estates the executors may, for example distribute most of the estate to the spouse (which is exempt from inheritance tax) but maintain in the trust an amount equal to your nil rate band and any other business-related reliefs available as a way of preventing unnecessary inheritance tax charges.
This means testators don’t have to worry about changes to tax law at a time when the government is regularly changing several aspects of tax law. The key is to make sure a detailed letter of wishes is prepared for your executors.
2. They are a useful way of protecting family wealth from issues such as: divorce proceedings; care fees; remarriage of the surviving spouse and incapacity to manage assets/bankruptcy by one or more beneficiaries
3. Allows your trustees to distribute your estate to certain beneficiaries only in circumstances set by you but which you will not be around to ensure are complied with. For example, you may be concerned that certain beneficiaries may not be mature or financially responsible enough to manage their inheritance wisely at the date of your death.
1. If trust assets aren’t distributed before the first 10-year anniversary there is the potential for a tax charge of 6% at that stage and at 10 yearly intervals thereafter, payable on trust assets over the NRB threshold). However, when compared to a potential 40% inheritance tax on the same assets on the death of a beneficiary (if given the asset outright), there is still an arguable saving. It is also worth noting that certain types of trusts such as trusts for the benefit of disabled beneficiaries would be exempt.
2. If income is paid by the trust to beneficiaries, income tax is charged at 45%. However certain beneficiaries will be able to reclaim the tax paid and specialist financial advice can be sought to invest in tax efficient investments.
3. Leaving your entire estate into a discretionary trust does theoretically prevent your estate from benefiting from the RNRB. This is because, one of the exceptions, referred to earlier is that the property must be inherited by “direct descendants” and the assets in this type of will are technically left to the trust. However, the trustees have the flexibility, as mentioned above, to effectively re-write the will in the way which best suits the estate. In this situation, the property can the appointed out to the direct descendants thus ensuring the RNRB is fully utilised.
To conclude, Flexible Will Trusts are, overall a highly flexible way of protecting family wealth against a variety of potential threats. However, as with any legal document, their suitability must be considered on a case by case basis.