Wills and Trusts: what you need to know

Making a will is so important that in my book The Money Plan I dedicated two chapters solely to wills and trusts. You work your whole life to earn money, so make sure it passes to the right people in the most tax efficient way. You should do this while focusing on abiding by both the legal and moral implications of estate planning.

Below you’ll find, at a headline level, the information you need to arrange these vital documents:

  • Why wills are important
  • Who’s involved in a will
  • How to set up a will
  • Trusts – why would you want to use one?
  • The types of trusts commonly seen in a will

Let’s be clear: EVERYBODY over the age of 18 should be thinking about their will and making one, and if you have children then this should be at the top of your to-do list.

What happens if we die without a will?

It depends on your situation: if you’re married with no dependents, your estate passes to your spouse; if you’re single, your estate goes to the crown.

If you have children or grandchildren and you’re married, your spouse inherits the first £250,000 and all personal possessions; and then also receives half of the remainder of the estate, with the other half split among dependents.

For example, Ken and Barbie are married with a son, Tom. Ken dies without leaving a will. His estate is worth £450,000. After Barbie inherits her share of £250,000 (plus all of Ken’s personal possessions), the estate that is left is worth £200,000. Barbie can have half of this, i.e. £100,000, and the other £100,000 is left to Tom.

So you’ve got to be careful and be aware of where you want your money to go.

Let’s look at another example: you’ve got a house with no mortgage, some asset savings and a buy-to-let property. If you die without a will in this scenario, it’s all very well your partner getting the first £250,000 but they may then own the house with your children or grandchildren. Now that’s OK because they’re your children, but what happens if you’re not so keen on your daughter-in-law or son-in-law? What if their marriage breaks down, who does the home belong to then, what does the divorce agreement say?

This is why it’s so important for everyone aged 18 or older to arrange their will.

Who’s involved in a will?

Testator: the person who sets up the will, i.e. you or me.

Executors: the people you trust to administer your will. They read it, close utility bills down, arrange the life insurance pay-out etc. Good executors are highly organised – people you can trust to get the job done. Most of us name our partner as an executor, and you should also name another person or persons. Executors need no legal experience, they can speak with a solicitor or financial planner if they require professional advice for a particularly complex estate.

Guardians: if you have minor children (legally defined as under 18 years old, but can be older too) then you need to appoint a guardian. Learn from my experience: appoint an individual rather than a couple, because sometimes couples break up! – and perhaps a reserve, just in case anything unexpected happens. Think primarily about geography: during a time of crisis, it’s likely to be very important that your children can continue going to the same school and enjoy some sort of routine.

Beneficiaries: the people who will inherit something in your will. There are different types, depending on whether they get a specific bequest such as an item of jewellery / a set amount of money; or the person who will inherit the residue of the estate, once all gifts have been made. Beneficiaries can be individuals or trusts, depending on how you want to protect your money (see below).

Finally, consider your funeral wishes and include them in your will. This isn’t to be morbid in any way, it’s to take responsibility for what you want to happen while you’re in a sound state of mind and avoid burdening those you leave behind. Whether you want a burial or your ashes scattered or taken up on a rocket (I’ve heard it done!), define your wishes in your will.

How to set up a will

Wills and power of attorneys

The easiest thing to do is go to the free downloads section of this site, where you’ll find a document entitled ‘Key questions about your will’. Take a little time to answer the questions and make sure you’re happy with your answers.

You can take this document to any solicitor and give it to them to arrange your will. Alternatively, you can scan it and send it to us, and we’ll arrange it for you, but this isn’t a sales pitch – it’s about getting your will organised, so do it however you’re most comfortable.

Trusts

For most people trusts aren’t well-known and we only really hear about them in a negative context concerning helping big organisations and rich people to avoid tax.

The reality is completely different, so don’t believe everything you hear. Trust legislation is some of the oldest in the land. A trust allows you to control the flow of your money, that’s all it does.

A trust is a separate entity which is looked after by trustees – a minimum of two, but you should preferably have more. They look after the money on behalf of the beneficiaries in what’s called a fiduciary responsibility: it’s not their money but they look after it for the beneficiaries. Of course, a trustee could also be a beneficiary, but that’s not always the case.

The assets in a trust can be anything from cash to investment to property to others, or a mixture of all of them. The money could have come from your will, in which case it’s called a will trust; or it could have been paid in during your life, in which case it’s called a lifetime trust (and may well also receive any death in serviced payments due, for example).

You might think you’re not particularly wealthy and therefore don’t need a trust. But perhaps you have property, pensions, money and a death in service payment which collectively in your estate would attract inheritance tax. That’s one reason why you might choose to put your death in service payment into a trust instead of in with the rest of your estate.

Why set up a trust?

There are two types of will. One is a basic, simple will which means when I die, I leave my assets to this person or people. The second is a trust will.

Let’s start by looking at what’s called a property trust.

As a married man with children you may think your will is simple; everything should go to my partner. But what happens if you leave your house to him/her, then (s)he remarries, and then gets divorced? Your share of the house could be part of the divorce settlement and (s)he might lose some of it. Or even worse, the survivor remarries and then dies, it would pass to the new spouse and then possibly to their children and not yours, who get nothing.

To repeat: a trust will is not about avoiding taxes, nor doing anything wrong. We’re just saying well actually, I own half this house and as much as I want my husband/wife to live in it in the event of me passing away, when they die I ultimately want my share to go to my children. That’s what a property trust does within a will: protects your share to pass on as you wish.

It has some other benefits in it around bankruptcy or being sued, but because your partner in the above scenario doesn’t own it all, it can’t all be included within their estate for assessment. They can use it during their lifetime, but it will pass on to my children if that’s who I decide I want to inherit my share of the house.

The second type of trust in a will is called a discretionary trust, and it’s for a scenario where you have a sizable estate and a child or children or other dependent who is not in a position in their life to inherit the sizable sum; too young, too vulnerable or in an unstable relationship. If they were to inherit a lot of money it might spoil or ruin them, prevent them from studying or striving; or perhaps while you love your child, you may not be so enamoured with their partner, or they may not have a strong future!

In such instances, you can leave some or all of your money in a discretionary trust (remember, your child can be a trustee). Trustees look after the money for the beneficiaries, which includes your children and future grandchildren, according to your intentions. You can leave a letter of wishes, stating your intentions – such as helping your children with education, a sensible business venture or a property purchase.

Because no single individual benefits from the trust, this kind of arrangement can protect your money for future generations, almost setting up your own legacy.

Using a trust is more expensive than a simple, straightforward will, but not prohibitively so and it’s not out of the reach of the ‘ordinary’ man or woman on the street. Particularly if you own your own home and have a chunk of money that you’re looking to protect, a trust is the way to do that.

If you take one thing away from this article, then please make a will. Use the free download I referenced earlier, take professional advice and protect your estate and your family.

 
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