Topic 5 - Wills, intestacy and trusts

Question 1

What is the definition of a will

Answer 1

• Written declaration of someone’s wishes for when they die
• Can be disposal of assets as well as matters such as funeral wishes

Question 2

What are the 4 parties in a will

Answer 2

1. Testator
2. Executor
3. Beneficiary
4. Witness/es

Question 3

Requirements for a will to be valid

Answer 3

• Must be in writing
• Should be dated - avoids confusion
• Each person has an individual will
• Statement that previous wills are revoked
• Will revoked automatically if married (unless was written in anticipation)

Question 4

What is a mirror will

Answer 4

• Will most commonly used by couples
• Almost identical, leaving everything to each other first, then to beneficiaries

Question 5

What is a mutual will

Answer 5

• 2 parties make similar wills containing agreement that on 1st death, survivor cannot revoke their will
• Ensures assets make it to intended beneficiaries (instead of re-married spouse for example)

Question 6

What is a codicil

Answer 6

• An extra page added to the will that allows you to make small changes to your will without having to make a new one

Question 7

What does intestate/intestacy refer to

Answer 7

• A person who has died without leaving a will
• Different rules apply to distribution of estate, covered in Inheritance and Trustee’s Powers Act 2014

Question 8

Define these terms:

1. Absolutely
2. Issue
3. Remoter issue
4. Spouse
5. Chattels

Answer 8

1. Beneficiary owns asset completely
2. Children
3. Great/grandchildren
4. Civil partners
5. All tangible, movable property except money

Question 9

Laws of intestacy surrounding distribution of estate

Answer 9

• Spouse receives chattels + £270k absolutely, then half of the remaining estate absolutely if there are children
• Children split rest of estate equally
• If there is no spouse or children, estate goes to the groups as follows:
• Parents
• Siblings
• Half-siblings
• Grandparents
• Crown

Question 10

What is a grant of probate

Answer 10

• Executors require valid grant of probate to begin distribution of estate
• IHT must be paid before probate granted
• Probate granted by probate registry

Question 11

What is a letter of administration

Answer 11

• When someone dies intestate, administrator is uncharge of winding up estate
• Letter of administration essentially a probate
• Letter has to be granted before IHT is paid and estate distributed

Question 12

What are the 2 methods of varying a will or intestacy and what are their key features

Answer 12

• Disclaimer - legacy rejected (as long as it was within 2 years of death) and bequest treated as if it never happened. Legacy passed back into estate, out of beneficiaries hands
• Deed of variation - if all beneficiaries affected agree, legacies can be re-directed as they wish, providing it does not affect other beneficiaries

Question 13

What us a gift with reservation

Answer 13

• Conditions on gift which could lead to it going back into estate
• E.G. gifting house with reservation to live in it rent free, which would make it part of their estate

Question 14

3 parties to a trust

Answer 14

• Settlor - creator/owner
• Trustee - person in charge of looking after/distributing estate
• Beneficiaries - people benefitting from estate

Question 15

Main duties of a trustee

Answer 15

• Must act in accordance with trust deed
• Understand their duties
• Must balance maximising and protecting investments from the trust fund
• Invest in line with the deed
• Must be honest
• Must be diligent to avoid losses
• Must balance interests of all beneficiaries

Question 16

What are the 3 certainties are needed for a trust to be valid

Answer 16

• Certainty of intention - clear that settlor intended to create
• Certainty of subject matter - trust deed must specify what property is going to the trust
  
  • Certainty of object - clearly stated beneficiaries

Question 17

What should a trust deed include

Answer 17

• What property or assets are to be held in the trust
• The trustees
• The beneficiaries
• The powers given to trustees
• Rights of beneficiaries

Question 18

What is a will trust

Answer 18

• Trust created through a will
• Bequests to will trusts treated as normal death transfers

Question 19

What is an absolute (bare) trust

Answer 19

• Established for one or more beneficiaries who are solely entitled to the trust assets
• Once they turn 18, they can demand the assets
• Gifts into an absolute trust treated as potentially exempt transfer

Question 20

What is a Interest In Possession trust

Answer 20

• Beneficiary will receive income or use of asset during whole life or on specified event (known as a contingency) like marriage etc.
• Two types of beneficiary - Life tenant (beneficiary with interest in possession) and remaindermen (other beneficiary who will benefit upon death of life tenant)
• Assets are set up as a gift (known as ‘relevant property’)
• Chargeable lifetime transfer (20% tax)

Question 21

What is an immediate post-death interest trust (IPDI)

Answer 21

• Similar to IIP, except trust written in will
• Gift made upon death, so subject to normal IHT

Question 22

What is a discretionary trust

Answer 22

Trustees given discretionary powers to:

• Appoint beneficiaries (from specified categories)
• Decide whether to pay a beneficiary, or if at all

Settlor has no power over who receives benefits

Question 23

2 main life assurance trusts

Answer 23

• Flexible trusts
• Split trusts

Question 24

What is a flexible (life assurance) trust

Answer 24

• Form of discretionary trust, where trustees can vary beneficial interests
• Settlor can appoint potential beneficiary or state categories
• Must appoint ‘default beneficiary’ who will receive proceeds if no others are appointed

Question 25

What is a split (life assurance) trust

Answer 25

• Normally used with COMBINED life and critical illness policy
• Splits payouts - CI paid to settlor upon diagnosis of illness and life policy paid into trust

Question 26

What is a gift and loan trust

Answer 26

• Investment trust using investment bonds
• Gift annual exemption (£3k) then make bigger gift (loan) and buy an investment bond
• Investment bond allows withdrawal of up to 5% of capital annually
• This is withdrawn and paid to settlor - must be spent so doesn’t go back into estate
• Final price of bond is exempt from IHT

Question 27

What is a discounted gift trust

Answer 27

• Similar to gift and loan, invests in investment bonds
• Agreed amount paid for lifetime, so if you live over expectancy, you take from beneficiaries legacy
• Any growth is outside the estate
• Income cannot increase

Question 28

What is a designated account

Answer 28

• Investing money for a child in the name of there settlor
• Can be investments made in many places
• Can be done as simply as leaving initials of child on account
• Child can access funds when 18

Question 29

What is the married women’s property act (1882) trust (MWPA)

Answer 29

• Trust made when life policy taken out on one’s life for benefit of spouse or child
• Benefits outside policy holder’s estate
• Can be used by men and women, civil partners and single people with children