Trusts and wills are often mentioned together, but they serve different purposes. A trust is simply a legal arrangement where trustees hold and manage assets for beneficiaries. A trust could be created by a will, or alternatively by a settlor whilst they are alive. The distinction affects control, tax treatment, privacy and administration. This article explains how each works and where they differ in practice.
What is a Will Trust?
A will trust is created within the will and only comes into effect on death. Until that point it does not exist. Once the estate has been administered, the trustees receive the relevant assets and begin to manage them in line with the trust terms.
Typically, a will trust involves:
- Testator: the person making the will
- Trustees: those appointed to hold and manage the trust assets.
- Beneficiaries: those who may benefit (now or later).
- Trust fund: the assets placed into trust (for example, a share of the estate or of a property).
Will trusts can take many forms, including life interest trusts and discretionary trusts, each with its own inheritance tax consequences.
What is a Lifetime (Inter Vivos) Trust?
A lifetime trust is established by a trust deed during the settlor’s lifetime. The assets are transferred while the settlor is alive, and depending on how the trust is drafted, the settlor may or may not remain involved as a trustee or beneficiary.
Lifetime trusts are used for succession planning, protection of family assets, and (appropriately advised) tax planning. Claims of “asset protection” in lifetime trusts should always be approached with caution and with appropriate advice given.
Practical Differences Between Will Trusts and Lifetime Trusts
The most obvious difference is timing. A will trust only begins on death, meaning the testator retains complete control during life. A lifetime trust requires the settlor to part with the assets now, and they cease to be personally owned except to the extent allowed by the trust terms.
There are also privacy differences. A Will (including the terms of the trust) becomes public once probate is granted. A lifetime trust is private from the outset.
Similarly, administration differs. A will trust can only function after the grant of probate and estate administration, whereas a lifetime trust operates immediately and may reduce the amount that needs to be handled by executors on death.
Tax treatment varies according to the structure. Most lifetime trusts fall within the relevant property regime, meaning they can attract lifetime entry charges (typically 20% above the nil‑rate band), as well as ten‑year anniversary and exit charges. Will trusts are taxed as part of the estate on death and may fall into specific regimes such as Immediate Post‑Death Interest (IPDI) treatment.
Pros and Cons of Will Trusts
Because the testator retains full control during life, will trusts offer considerable flexibility. If circumstances change, the testator can amend or remove the trust simply by updating their will. By contrast, unwinding a lifetime trust is far more complex.
Will trusts are also well‑suited to providing for minors or young adults, including through bereaved minors’ and 18–25 trusts. However, will trusts cannot avoid the need for probate, and any tax planning opportunities are limited by the fact that assets passing into the trust are initially taxed as part of the testator’s death estate.
Pros and Cons of Lifetime Trusts
A lifetime trust takes effect straight away, giving scope for planning during the settlor’s life. Because the assets are already in trust, they are generally outside the settlor’s estate for probate purposes, which can streamline administration. A grant may still be needed for other assets.
However, transferring assets into trust is a genuine disposal. The settlor must not expect to treat the assets as if they still belong to them. Lifetime trusts are also more complex and costly to maintain. They require trustee administration immediately, whereas will trusts only require administration once the testator has died.
The IHT position can be less favourable if periodic and exit charges apply. If the settlor continues to benefit from trust assets, any IHT advantage is neutralised under the “gift with reservation” rules and this would also make the estate administration more complex.
Lifetime trusts are often marketed as a tool for avoiding care fees, but in practice they are rarely effective for that purpose. If a local authority concludes that the primary motive for creating the trust was to reduce future care contributions, the assets may be treated as “notional capital” and assessed as though still owned by the settlor.
Hybrid Planning: Using Lifetime “Pilot” Trusts
Estate planning is not always a choice between one form of trust or the other. A common hybrid approach involves setting up a pilot trust during lifetime, usually a simple discretionary trust settled with a nominal amount. The will would then direct that part or all of the estate should be paid into that trust on death.
This structure offers several advantages. The trust already exists, with trustees in place. The terms of the trust are not in the will, so it keeps some secrecy. It also allows the will to remain shorter and less repetitive, as the trust terms are already set out in the deed. However it usually adds additional costs for drafting and if the trust is no longer required in the future it generally means that money could have been wasted.
Conclusion
A will trust only takes effect on death, while a lifetime trust begins immediately and requires the settlor to transfer assets during life. Each structure offers different advantages in terms of control, privacy, administration and tax. The right choice will depend on the client’s circumstances and objectives.
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