Will trusts are a popular estate planning tool, offering flexibility and control over the distribution of assets after death. However, there are several misconceptions regarding the extent of their uses. This article examines the limitations of will trusts, particularly in relation to care fees, the Inheritance (Provision for Family and Dependants) Act 1975, creditor protection, and tax planning.
Protection Against Care Fees
A fundamental limitation of a will trust is that it only takes effect upon the death of the testator. As such, a will trust does not remove assets from the testator’s estate during their lifetime. Will trusts do not provide protection against the testator’s own care costs.
Attempts to transfer assets into trust during lifetime for the purpose of avoiding care fees may be deemed a deliberate deprivation of assets, potentially resulting in local authorities disregarding the trust for means-testing purposes.
However, will trusts can protect assets from being used to fund the care fees of a surviving spouse or other beneficiary, by ring-fencing assets for their benefit without granting them outright ownership.
Immediate Access to Assets
Will trusts cannot be used to provide for beneficiaries or manage assets during the testator’s lifetime. They do not come into existence until the testator’s death. For asset management during incapacity or to provide for beneficiaries during lifetime, alternative arrangements such as lifetime trusts or Lasting Powers of Attorney are required.
The Inheritance (Provision for Family and Dependants) Act 1975
The Inheritance (Provision for Family and Dependants) Act 1975 (“the 1975 Act”) allows certain categories of people to make a claim against an estate if they believe reasonable financial provision has not been made for them. The existence of a will trust does not prevent such claims. The court has wide powers to vary the distribution of the estate, including assets held in trust, to ensure reasonable provision is made. As such, a will trust cannot be used to completely exclude potential claimants under the 1975 Act.
That said, certain will trusts may be better placed than others in addressing a potential 1975 Act claim. For example, a disabled person’s trust could be considered to provide for a vulnerable beneficiary which would be less likely to trigger a 1975 Act claim than excluding them entirely.
Protection Against Creditors
Will trusts do not shield assets from the deceased’s creditors. Upon death, the estate, including assets passing to a will trust, remains liable for the payment of debts and liabilities. Creditors’ claims take precedence over distributions to beneficiaries.
A will trust can however be benefit a beneficiary whilst protecting assets from a beneficiary’s creditor, as giving to them outright could put the inheritance at risk.
Tax Avoidance
Will trusts are sometimes incorrectly promoted as a means of avoiding inheritance tax or other forms of taxation. While certain will trust structures can provide tax planning opportunities, they do not confer blanket exemption from taxation. The effectiveness of any tax planning strategy will depend on the client’s individual circumstances and the prevailing tax legislation.
For example, a nil-rate band discretionary trust can be used to maximise the use of nil rate bands between unmarried couples or life interest trusts can be used to benefit a surviving spouse whilst preserving the spousal exemption. Which trusts to use in a will depends on the client’s exact circumstances and intentions.
Conclusion
Will trusts are a valuable component of estate planning, but their limitations must be clearly understood. They do not operate during the testator’s lifetime and only come into effect on death. The client’s circumstances always need to be assessed to consider whether a will trust is suitable, and if so what type of trust is best for them.
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