Shielding inheritance: How to I protect hard-earned money from a spendthrift son (Stock image)
My wife and I are tenants in common on our property, we have a will in place and we have a total of around £800,000 cash and property with no mortgage.
My problem is this: I have one son married but the other is a spendthrift and would soon blow this hard-earned money on rubbish.
I would like to give them enough in the will to clear the balance of their mortgage and say enough to live on per year, with a clause that in case of a rainy day problem they could with good cause draw money out for that.
Where could I look?
SCROLL DOWN TO FIND OUT HOW TO ASK HEATHER YOUR TAX QUESTION
Heather Rogers replies: If your beneficiaries are very young, or they are older but vulnerable, or you are concerned for another reason about their ability to manage an inheritance, you can consider setting up a trust through your will – a will trust.
What is a will trust?
These are created through your will and detail how your estate will be managed and distributed on your death.
They are useful for preserving an inheritance that is to be passed on to future generations.
This usually involves appointing trustees who will manage the assets that pass into trust.
Will trusts enable you to pass on your assets whilst adding certain restrictions – who benefits from what and when.
How do will trusts work?
There are several types of trust you can create through your will. The three main types are as follows.
Bare Trust: Usually used for those under 18.
Life interest trust: Often used for giving the right to occupation of a home or the right to income during a person’s lifetime, for example to protect a spouse.
The asset is inherited by a third party on their death, for example children.
HEATHER ROGERS ANSWERS YOUR TAX QUESTIONS
I covered a particular use of this in my answer to a previous reader question – a property life interest trust: My wife fears if I die first my children will sell our property against her wishes.
Discretionary trust: This is the type of will trust used most often.
These are set up to pass on an inheritance to young or vulnerable beneficiaries, or where there is other cause for concern someone will not be able to manage an inheritance.
A discretionary trust works exactly as described in its name.
It is flexible in that the trustees you appoint to manage the trust will make the decisions over when and how the beneficiaries receive the assets or the income.
It is important when selecting trustees that you are satisfied they will carry out your wishes.
You can leave a letter of wishes with your will which can be more specific in your instructions.
What are the usual reasons for setting up a will trust?
People may wish to set up a will trust to ensure that a minor child or grandchild does not inherit before a certain age, or to protect vulnerable beneficiaries who may need assistance in managing their inheritance, or to look after assets if beneficiaries are unable to handle an inheritance for some other reason.
They can also help to protect assets in certain situations such as if a surviving spouse remarries and you are worried about disinheritance of children in that event.
You can give the trustees the power to make decisions about who needs money most in the future, rather than passing on all of your estate equally to your beneficiaries.
How do you choose trustees?
Often the executors of the will are the trustees, but you can choose who you like.
It is both a responsible role and often a difficult one. All trustees must agree with any decision if there is more than one trustee.
It is often a good idea to have a solicitor or similar professional as one of the trustees as they are independent, but of course that comes at a cost to the trust.
What about the tax implications of setting up a will trust?
There are different tax implications on different trusts, but money transferred straight after death into a discretionary trust is liable for inheritance tax.
However, further charges are added because the assets held in trust are not going to be part of the beneficiaries’ estates for inheritance tax purposes.
Therefore, transferring the assets out to the beneficiaries from a discretionary trust will normally also give rise to an inheritance tax exit charge.
This can be avoided if the assets are transferred out within two years of death – no exit charges are payable in that scenario as the transfer is deemed to have been made by the deceased in their will.
But another point to note is that the income tax and capital gains tax positions where assets are distributed by trustees in these circumstances may differ from the position had outright bequests had been made instead.
Meanwhile, if the assets do not come out of the trust within two years from the date of death, then inheritance tax exit charges will apply.
Also, inheritance tax charges will apply on every 10th anniversary of the trust’s creation.
These are complicated and Gov.uk has details here on how the exit charges and inheritance tax charges are worked out.
Beware: if the estate is left to a discretionary trust rather than direct descendants, then unless the assets are transferred out within the two-year period, there is a potential loss of the ‘residence nil rate band’ (see the box on the right), meaning more inheritance tax will be payable on the estate.
What about ongoing tax implications?
The trust will have to be registered with the Trust Registration Service (TRS) and the trustees will usually have to complete an annual tax return and pay any tax due – on income earned or sales of assets.
This varies depending on the type of trust used. Bare trusts do not usually require a tax return but still need to be registered with the TRS.
What else should you consider before setting up a will trust
Some trusts, particularly discretionary ones, can be quite costly to run (they can run for up to 125 years).
If beneficiaries feel aggrieved as they are dependent on trustees for their share, this can give rise to disputes and claims against the estate which can be self- defeating.
In your case, as your estate is currently worth less than £1million and would qualify for the residence nil rate band if the home or proceeds of same are left directly to your descendants, then your estate should escape inheritance tax unless of course there are pre-death gifts to account for.
I explained the situation with gifts in this previous column: My 86-year-old grandfather is making large cash gifts to family members.
You could therefore lose the residence nil rate band if the assets pass into trust rather than to your descendants and remain for more than two years.
As you want to assist with your sons’ mortgages too, you could split your assets between your sons directly and the trust to avoid loss on the residence nil rate band.
However, then you have to weigh up the ongoing costs of the remainder of the estate being in trust and the benefits.
I suggest speaking to your sons first and then taking advice from a solicitor before making a decision.
Ask Heather Rogers a tax question
Tax expert Heather Rogers answers our readers’ questions
Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a question about tax, email her at [email protected].
Heather will do her best to reply to your message in a forthcoming monthly column, but she won’t be able to answer everyone or correspond privately with readers. Nothing in her replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.
Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.
If Heather is unable to answer your question, you can find out about getting help with tax here, including sources of free professional advice if you are elderly and/or on a low income.
You can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. Its number is 0800 011 3797.
Heather gives tips on how to find a good accountant here, including when to seek help, hiring the right type of firm and typical costs.
