Trusts
The person donating assets to the trust is known as a donor. Trustees are the people appointed to manage the trust (usually "trusted" friends or family). The intended/ potential recipients of the trust are the beneficiaries.
Many types of trusts are available, and Fern Wills & Trusts can help you understand your options. Each trust has advantages and disadvantages regarding intentions, consequences and tax. Each discretionary trust can be unique and tailored to the settlor’s intentions and beneficiaries’ needs. It is always advisable for General Discretionary Trusts and Flexible Life Interest trusts (FLIT) to be accompanied by a Letter Of Wishes.
Here are a few examples of the most popular trusts:
Bare Trust
The simplest type of Trust. If a gift is stated in a Will, such as £5,000 to each grandchild. If any of the grandchildren are under 18 or age the Will specifies (vesting age) when it is activated (Proven). Then the £5000 will be held in Trust until they reach 18. The trust is assessed for tax on the beneficiary as if the money were owned by them.
Discretionary Trust
The trustees use their discretion in how trust assets are used for the beneficiaries. They can provide financial assistance based on individual needs and circumstances, usually just as you would have done if you were still here. This offers greater flexibility to react to changing circumstances.
The General Discretionary Trust is mainly designed for dependent children whose parents have passed away, but it can also be used for other circumstances.
🌿Providing for minor children: A discretionary trust can be used to provide for minor children (under 18yrs) until they reach a certain age or a specific event, such as completing their education. This can ensure that the children's needs are met without giving them access to a large sum of money before they are ready to handle it.
🌿Provide guidance and safeguarding: There may be instances when it is undesirable for a beneficiary to inherit a large sum of money or property at age 18. The trust can be held until they are deemed ready, and the trustees can release funds to cover beneficiaries' health, well-being, and education.
🌿Providing for Family Members with Complex Needs: If you have family members who require long-term care or have a disability, a Vulnerable Persons Trust (VPT) can offer ongoing financial support after your death. The trustees can ensure that beneficiaries’ needs are met without affecting their eligibility for means-tested benefits.
🌿Asset protection: Discretionary trusts shield assets from third parties, such as divorced spouses, bankruptcy or other creditors.
If the settlor (Will Provider) transfers more than the inheritance tax nil rate band (tax-free allowance) into a discretionary trust within a 7-year period, a 20% tax charge will apply on any excess above the allowance, and an assessment/ charge will be assessed every 10 years.
Right of Occupation (ROO)
This gives the right for the occupant to live in the property for as long as they wish so long as they keep the property in good repair and insured. The property can be sold and another bought on the same terms of the trust. If the house is downsized, the surplus income goes to the beneficiaries (usually the children). The main difference between a right of occupation and a Life interest is that with an ROO, the occupant has no automatic rights to income from rent or surplus of sale. This has a disadvantage if the occupant would otherwise have financial difficulty with the upkeep of the property.
Life Interest Trust (LINT)
A Life Interest Trust (LINT) is a trust established in a will in which a life tenant (often the surviving spouse or civil partner) is granted the right to reside or receive income from specific assets (such as property) during their lifetime.
🌿Operation: The life tenant enjoys the use of the property and any income from it, such as rent or investment income. The property belongs to the trust, not the life tenant. Upon the life tenant’s death, the trust assets pass to the remaining beneficiaries designated in the Will & Trust. Life interest trusts are useful if there is a possibility of the primary residence being sold for upsizing or downsizing in the future, and the life tenant can continue to live in the new property or benefit from rents or income from the proceeds of the sale.
Flexible Life Interest Trust (FLIT)
A Flexible Life Interest Trust (FLIT) combines a life interest and a discretionary trust. It offers income or a home during the life tenant's lifetime. FLITs are often used for asset protection. Parents may use a FLIT to benefit their spouse while safeguarding assets for their children. The initial life interest allows the life tenant to benefit from income while protecting the assets from third-party claims (e.g., bankruptcy or remarriage). When the life interest ends, the discretionary beneficiaries inherit in a protected manner.
The FLIT names a life tenant, typically the testator’s surviving spouse or civil partner. While the life tenant is alive, they are entitled to all income the trust generates. Additionally, the trust includes a discretionary power that allows the trustees to advance capital to the life tenant during their lifetime.
🌿Tax Implications: When the life interest ends (usually upon the life tenant’s death), the trust continues as a discretionary trust.
The life tenant is treated as inheriting the trust assets for inheritance tax purposes.
If the life tenant is the deceased’s spouse or civil partner, the spousal exemption usually applies, resulting in no inheritance tax upon the deceased’s death. While assets are held in the life interest during the life tenant's lifetime, there are no anniversary or exit charges.
However, this may change if part or all of the life interest is revoked. After the life interest ends, the trust is treated as relevant property, and anniversary and exit charges may apply.
For more detailed information on FLITs, see the supporting documents page or contact us at info@fernwills.com
