The benefits of setting up a trust

Many wills involve a trust of one kind or another.  If you want to provide for a surviving spouse but make sure that the assets ultimately pass to your children, you can leave a life interest trust for your spouse (which also benefits from the inheritance tax spouse exemption) with your children being the ultimate beneficiaries.  This is particularly useful when there are children from a previous relationship, when there is a likelihood of the surviving spouse remarrying and/or there is a significant discrepancy in wealth between the spouses.

Discretionary trusts of the nil rate band (for example, the inheritance tax allowance) used to be commonplace before it became possible in 2007 to transfer the unused portion of the first spouse’s nil rate band to the surviving spouse on death and effectively accrue up to a double inheritance tax allowance.  These trusts are now less common, but they can still be helpful in second marriage scenarios, either to make sure that the right beneficiaries get the benefit of your nil rate band, or to avoid the nil rate band of a deceased first spouse being wasted.

At its most extreme, some people leave their whole estate on discretionary trust.  This does not necessarily mean that the trust is intended to continue in this form for long after death. Any changes made to the trust within two years of death are read back into the will for inheritance tax and capital gains tax purposes.  

In addition to protecting assets for the vulnerable individual from themselves and others, a disabled person’s trust is not subject to the usual tax rules for trusts, but instead special rules apply.

The reason for this type of will trust, is to create maximum flexibility for the trustees to make the best decisions, based on circumstances and the legal and tax landscape at the time.

Disabled person’s trust

Where an individual or a family member has a disability and is incapable of adequately managing their financial affairs, it is possible to hold funds under a disabled person’s trust.  While these trusts are often discretionary in nature, the trust assets will be held and managed by the trustees for the disabled individual as the principal beneficiary.  

In addition to protecting assets for the vulnerable individual from themselves and others, a disabled person’s trust is not subject to the usual tax rules for trusts, but instead special rules apply. These ensure that they are taxed no more punitively than if the assets were owned by the beneficiary.  Also, funds held in this way should not be included in an assessment for means tested benefits.

Life insurance trust