5. Wills & 6. Trusts

Question 1

What are the 3 requirements for a testator?

Answer 1

To make a will:
18+ and of sound mind, memory and understanding
Have specific intention of making a will
Know what a will is, the property they are leaving, who they are leaving it to and how it will be distributed

Question 2

What are the 3 types of wills?

Answer 2

Mirror - each partner makes identical will leaving everything to each other first, then children/named beneficiaries

Mutual - each partner makes a similar will. Contains agreement that after first death, survivor cannot amend their will

Codicil - minor changes to existing will - needs 2 witnesses

Question 3

What are the requirements for a valid will?

Answer 3

In writing

Testator’s signature witnessed by 2+ people 18+ (witness or their spouse cannot be beneficiary)

Question 4

What are the other features of wills? (6)

Answer 4

Should be dated to avoid confusion
Each person should make own will
Clear statement that previous wills are revoked
Automatically revoked on marriage unless specifically provided for
No legal requirement to be drawn up professionally
Divorce does not revoke but former spouse’s share goes into estate

Question 5

7 key general principles of intestacy?

Answer 5

Spouse only benefits if they survive the deceased by 28 days
Divorcees have no rights and estranged/separated treated as married
If a relative dies before intestate, their children inherit their share equally
Step/foster children have no rights but can claim for provision
Full blood relatives take precedent over half blood
In-laws have no rights
Shared assets are excluded (they go to surviving owner)

Question 6

What is the order of intestacy?

Answer 6

If spouse + children: spouse gets chattels and first £322k of estate, plus half of remaining estate. Children get remaining half.

If spouse/children only, they get everything (equally)

Grandchildren
Parents
Siblings (full then half)
Grandparents
Uncles/Aunts
Crown/Treasury

Question 7

What must executors/administrators do before distribution?

Answer 7

Obtain grant of probate from Probate Registry
- small estate exemption £5k
- N/A for joint tenancy property
- need to complete and pay IHT first

Administrator of intestacy needs letter of administration

Question 8

How can wills or intestacy be changed by beneficiaries?

Answer 8

A beneficiary can reject a bequest by written disclaimer, within 2 years death

Deed of variation - unanimous agreement between affected beneficiaries (18+)
- within 2 years of death
- cannot be made in exchange for consideration

Question 9

What are the 3 conditions on which a trustee can invest assets when power to do so is not specifically conferred in the trust deed?

Answer 9

Be aware of need for diversification and selecting suitable investments

Obtain and consider proper advice when selecting/reviewing investments

Keep investments under review

Question 10

What are the 3 “certainties” of a trust

Answer 10

Certainty of:
Intention: settlor intended to create a trust

Subject matter: specifies which assets

Object: beneficiaries must be clear

Settlor cannot amend trust deed once assets have been settled into it.

Question 11

Describe an Absolute or Bare trust?

Answer 11

Specific beneficiaries who can demand assets if 18+

• Beneficiaries and terms cannot be changed
• If beneficiary dies before receiving assets, they go into their estate
• Ensures certainty of beneficiaries

Question 12

Describe an Interest in Possession trust

Answer 12

Beneficiary can receive income for lifetime or from/until contingency

Life tenant is the main beneficiary

Remaindermen benefit on death of life tenant

Question 13

Describe an immediate post-death interest trust

Answer 13

Trust created in a will, for beneficiary to receive income for life or contingency

Gift is at death so subject to IHT

Question 14

Describe a discretionary trust

Answer 14

Trustees can appoint beneficiaries from a specified category
Trustees can choose whether to pay income or capital to beneficiaries
Trust assets do not belong to any beneficiaries so excluded from estates

Question 15

What are the 2 types of life assurance trust?

Answer 15

Flexible: trustees can vary beneficiaries but settlor must appoint default beneficiary

Split: combined life assurance + critical illness

Question 16

Describe a Gift & Loan trust

Answer 16

Settlor gifts trust (usually £3k) and loans it a lump sum
Trust invests gift + loan in a bond
Settlor takes 5% repayment annually as income, for up to 20 years
Any outstanding loan at death goes back into estate
Bond growth site outside of estate for IHT

Question 17

Describe a designating account, and who bears the tax?

Answer 17

Alternative to trust

Investment on child’s behalf e.g putting child’s initials at end of account name

If source of investment is parent, any income is treated as theirs and taxed

If source of investment is not parent, income is treated as the child’s

Question 18

Describe the Married Women’s Property Act and IHT treatment

Answer 18

A trust is created when someone takes out a life policy on their own life for the specific benefit of spouse or children

Benefits are outside the policyholders estate for IHT and creditors

Question 19

Describe a discounted gift trust?

Answer 19

Donor buys bond through trust (gift) and takes fixed income (max 5% pa)
Investment value is discounted by life expectancy. Discount amount (donor’s funds) leaves estate. Remaining investment treated as a gift (PET if bare trust / CLT if discretionary trust)
Growth on bond is outside of estate

Question 20

How do trusts pay tax?

Answer 20

Trustees complete self assessment

Question 21

What are period charges and exit charges of trusts?

Answer 21

IHT on trusts when value exceeds NRB in a tax year.

Periodic: trust value at 10th anniversary (max 6%)
Exit: when any capital is paid out of trust

Question 22

How are trust beneficiaries taxed on death (IHT)

Answer 22

If CLT applied when trust was set up, no IHT due on death of beneficiary

If no CLT applied, assets are treated as belonging to beneficiary so subject to IHT on death

Question 23

How are absolute/bare trusts taxed?

Answer 23

Income received by beneficiary subject to income tax

Question 24

How are interest-in-possession trusts taxed?

Answer 24

Trustees can mandate income to beneficiaries - subject to income tax

If not mandated, trustees subject to basic rate (no allowances) then income is paid to beneficiaries net of this

Question 25

How are discretionary trusts taxed?

Answer 25

Trustees pay basic rate on first £1k (standard rate band), additional rate on remainder (no allowances)

Standard rate band spread over all of settlor’s discretionary trusts, min £200 per trust

Beneficiary pays income tax on income received, less tax already paid by trustees

Question 26

How is CGT applied to trusts? Settlors + Trustees (threshold & rate). How does it differ for bare trusts?

Answer 26

Settlor transfers into a trust are treated as disposals.
Holdover relief applies (excl bare trust) - defer to subsequent future disposal by beneficiary/trust

Trust distributions are treated as disposals - trustees liable.
Subject to higher rate and have 50% of annual exemption available, spread over all of settlor’s trusts (min 20% per trust)
Bare trusts - assets deemed to belong to beneficiary (full annual exemption)