What’s the difference between a lifetime trust and a will trust?

Difference between lifetime trust and will trust

Trusts can seem like a complex area, especially if you’re unsure of the differences between certain types of trust. Many people get confused when trying to compare a lifetime trust with a will trust. So, we decided to explore these in more detail to give you greater clarity.

What’s a trust?

Let’s start with the basics; trusts give you control over what happens to your assets. A trust is like a safe. You put your money or things into the safe, to lock it away and protect them. Hoping to pass them onto someone else (the beneficiaries) later down the line. You also appoint people you trust (the trustees) to look after the contents of the safe, and they have the combination to unlock it, but only following the instructions you’ve made (the terms of the trust).

The main two types of trust are either a will trust, which starts on your death or a lifetime trust, created during your lifetime. Both work in slightly different ways.

Will trust

Hopefully, we are familiar with what a will does and the importance of making one. Known as a “testamentary trust”, a will trust is created in your will, but only comes into force after you pass away. At which point the trustees then manage the trust on behalf of the people you are leaving your assets to, the beneficiaries. A will trust gives you control over your estate and has a few advantages.
The following benefits apply to a will trust:

  • Can be used when a couple owns a home as “tenants in common”. Each person’s share would be left to the trust, which then comes into force when one person dies.
  • Helps you to avoid “sideways inheritance” issues. For example, when someone remarries and then passes away, if a will trust isn’t in place, children from a previous marriage may not inherit and everything could automatically go to the new spouse. In this circumstance, a will trust can be a way of allowing your spouse to remain in the property or take income from an asset until they pass away, at which point the assets pass to your children rather than forming part of your spouse’s estate.
  • Provide for vulnerable beneficiaries

There are a few different types of will trust, and the type of trust you select will depend on your circumstances and what you want to happen to your assets on death. A legal professional can advise you as to which route to take when creating your will trust.

Lifetime trust

A lifetime trust is different from a will trust, as it comes into force straight away, not on death. You can continue to benefit from the assets whilst you’re alive, but also protect them and retain an element of control. So, for example, you can carry on living in your home after it has been gifted to a lifetime trust.

The main benefit of this type of trust is the protection it can give your estate should one of your children divorces, become bankrupt, or if they were to pass away before your spouse or partner.

Be aware that you CANNOT use a lifetime trust to do the following:

  • Gain exemption from local authority care home fees. Setting up this type of trust for this reason could cause issues, as it may be viewed as a “deliberate deprivation of assets”.
  • Avoid inheritance tax. If your house is gifted to a lifetime trust, inheritance tax may still have to be paid if the estate value is over the tax threshold, which is currently £325,000 (February 2022).
  • Avoid fees and charges. When transferring the property into this type of trust, you may be liable for an instant 20% charge on the balance over the inheritance tax threshold, which includes any gifts made in the past seven years.

Before you decide on any type of trust, make sure you are clear on the reasons why you want to set one up, who you want to benefit and when. Inheritance planning is important as you want to make sure the right money ends up in the right hands at the right time, either while you are still alive or after you pass away.

If you’re thinking about setting up any type of trust and need advice, get in touch to speak to our independent financial planners.