May 2021
When embarking on having a will prepared, it is tempting and understandable to say that one wants a simple will only because one’s affairs are straightforward and there is nothing that is complicated. That would certainly be the case in many cases, but that may not be the case in others. Even if one’s matters are simple and straightforward, there might still be the need to reflect on that. So, what is the type of will that is most suitable for you and what are the options. There are possibly three types of will which are explained below. It is intended to provide a few basic pointers for you to consider, to assist you in concluding a will that best fits your circumstances and in the interest of your estate and your beneficiaries.
Basic Will
A basic will would simply gift your assets (or estate) outright and absolutely to your beneficiaries on your death.
A gift made outright/absolutely means that there are no conditions attached to a beneficiary inheriting your assets/estate.
To give an example. A married couple may have adult children and grandchildren. Their wills will leave their estate to each other. On death of both, their estates would pass to their children, but if any child were to die before their parents, that child’s share would pass instead to their children. Any beneficiary inheriting is free to deal with the assets/moneys they receive. It is theirs to deal with as they see fit.
What does this mean? Let us consider a few scenarios.
- Vulnerable beneficiary
A beneficiary may not be astute or wise in handling money regardless of the sums involved. They may be influenced by others or seen to be a ‘soft touch’ or generous. Consideration should be given if it is sensible for that beneficiary to inherit outright and if in the alternative a layer of protection might be better.
- Bankruptcy
At the time a beneficiary inherits and is bankrupt, the beneficiary would be required to hand their inheritance to the trustee in bankruptcy to clear the debt. Your assets/estate is lost in the hands of the trustee in bankruptcy. Could an alternative method of gifting have been a better answer?
- Incapacity
A beneficiary may be incapacitated and being funded by the welfare state. It is likely such benefits may come to an end if that beneficiary inherits an amount that exceeds the welfare threshold. It is possible to safeguard against the welfare benefits funding being put at risk.
- Divorce
In divorce proceedings any inheritance is likely to be considered in the financial settlement. A parent’s assets/estate may well pass to their child’s spouse/civil partner in the divorce action. It might have been possible to protect against this happening.
- Changes in Tax Laws
When inheritance tax law changes, it is usual for a review of your will and the need for the will to be updated to avoid any adverse tax ramification that may arise.
- Costs
Should you or your beneficiaries’ circumstances change over a period, it is likely that the will would need to be updated.
Discretionary Trust Will
One cannot predict with certainty one’s family circumstances in the future.
Under this type of will, the will does not say or provide who inherits. Due to the very title of the type of will, the distribution of one’s assets/estate is left in the hands of your chosen trustees you have named in your will. Your trustees have total discretion as to which beneficiary benefits, when they benefit and how they benefit. Until the trustees pass over the assets/estate to the beneficiaries, they will hold your assets/estate.
Similar to any will, your trustees can be members of your family; they can be your friends or your professional advisers. Indeed, you can have a mixture of them.
The vital document needed for this will is a letter of wishes.
- Letter of Wishes
A letter of wishes is a private letter that is prepared at the same time as the will and addressed to your trustees. The letter sits alongside the will. The letter of wishes lets your trustees know how you wish for your assets/estate to be distributed. Whilst a will is a legally binding document, a letter of wishes is not. It is, therefore, important you carefully choose your trustees. They are to be trusted, you know them well, they are responsible and will carry out your wishes in the spirit you intended. It is said that the trustees are not bound to carry out your wishes. That is true, but if your trustees are to be trusted, it is difficult to see why they should not carry out your wishes and act in the best interest of your estate and your beneficiaries. But equally, the trustees may not wish to carry out your wishes if they see there are very good reasons to do so. For example, your beneficiary’s situation may be so different at the time of your death to what it was when your letter of wishes was prepared and signed.
However, due to the very nature of the flexibility of this will, it does protect your estate and your beneficiaries against all the above scenarios, namely a vulnerable beneficiary, bankruptcy, incapacity, and divorce.
- Vulnerable beneficiary
In such circumstances, your trustees may decide not to make any large payments to that beneficiary. If they make no payments the trustees could at least drip feed money to that beneficiary and assess, moving forward, how that beneficiary managed that payment, before transferring more money to that beneficiary.
- Bankruptcy
Until the beneficiary is discharged from bankruptcy, the trustees will not want to make payments to that beneficiary. But once the discharge is issued, the beneficiary would be safe to receive their entitlement.
- Incapacity
Whilst the beneficiary is incapacitated and in receipt of welfare benefits, the trustees would at best, again, drip feed the beneficiary with funds as and when needed to pay for holidays, medical fees, and the like.
- Divorce
The trustees would argue for your beneficiary not to inherit until the divorce has been concluded. It is possible that the argument may fail, but it is worth putting up a challenge to at least mitigate as much as possible the funds passing to your beneficiary’s spouse/civil partner.
- Tax changes
If, say, inheritance tax laws change, there might not be the need to change your will. Maybe your letter of wishes may need to be updated. The costs of updating the letter of wishes would be less than changing a will.
- Costs
If family dynamics change, only the letter of wishes would need to be updated, without the need to change the will. Again, it would be more cost effective to change a letter of wishes, than a will.
There are other benefits.
- Tax Planning
On death of one spouse/civil partner, the surviving spouse/civil partner may wish to carry out tax planning to pay less inheritance tax under his or her estate on his or her death. Such tax planning would be carried out in the estate of the first spouse/civil partner’s death.
- Distribution Amongst Beneficiaries
Between the beneficiaries, say, adult children, they may agree to share their inheritance between themselves and their children; and/or a sibling may wish to pass a greater share to their other sibling(s).
For many, the word ‘trust’ throws up some worrying thoughts and implications. On death, indeed a trust would arise. But, if for any reasons there are no concerns of any beneficiary inheriting for the reasons mentioned above, the trustees would distribute the estate in accordance with the letter of wishes and bring the trust to an end.
It is only if for any reason the trustees are concerned for a beneficiary and consider that it would not be in the beneficiary’s best interest to inherit (or at least for a while) the trustees can safeguard the funds and wait until the concerns or dangers are over before handing the moneys to the beneficiary.
Immediate Post-Death Interest
Under this third type of a will, your intended beneficiary, called the ‘life tenant’, would not be gifted your assets/estate. Like a discretionary trust will, the trustees would hold your assets/estate.
This type of a trust was previously called a life interest trust.
Your life tenant would benefit from the income/interest paid to them from the assets/estate held by the trustees, which may be invested in the stock market, other types of investments or even in a property. If the deceased owned a property, the life tenant would have the right to live in that property. Subject to the terms of the will, it is that life tenant’s entitlement that cannot be given away. The entitlement ends on the death of the life tenant, or earlier if the will says otherwise, for example, re-marriage or entering a civil partnership by that life tenant.
When the life tenant’s entitlement comes to an end, the estate then passes to your ultimate chosen beneficiary.
It is typical to see this kind of will where there is, say, a second marriage and there are children born by the first marriage. The will would give a life interest to the surviving spouse and on the death of the surviving spouse the children born by the first marriage then inherit the assets/estate held by the trustees.
This type of a will gives assurance that the children by the first marriage would eventually inherit. The assets/estate will be protected for their benefit. If, on the other hand, the estate was to pass to the surviving spouse outright and absolutely (as described above under a basic will) there is no assurance that the children by the first marriage will eventually inherit.
The trustees could be granted with a power to advance capital to the life tenant. The income from the trust may not be sufficient and the life tenant’s own resources may be limited and need funding for, say, medical purposes. The trustees may, in their discretion, exercise their power to release the whole or any part of the assets/estate to the life tenant.
If you have any queries or need further advice on Wills please contact our Private Client Team.
