Is Trust the Issue?

Copy of Private Client Blog Friday 20th November 2020

Is Trust the issue?

In this issue we focus on the growing trend of the use of family trusts within Wills.

Sadly, divorce happens, but there may come a time when one or both of the parties will want to start over again with a new relationship or a further marriage or civil partnership. Inevitably, there are assets bought together with the new partner, such as the new marital home. Understandably, couples will want to protect their own children and grandchildren and start to consider how best to do this by making or changing their Will.

Generally, when you have a standard Mirror Will in a partnership, you leave your assets to each other on first death and on second death you often leave your assets to your children or other beneficiaries. This all sounds very straightforward, however, once the first partner passes away, it is of course open to the surviving partner to change their Will. Of course, many clients will say that they trust their partner to ‘do the right thing’, but as we know, circumstances and relationships can change.

If this is your first marriage or civil partnership, you might be concerned about what would happen if you die and your partner re-marries or cohabits. You may already be in a second relationship or in a civil partnership, marriage or considering it. You might be concerned about what might happen to your children’s inheritance and want to discuss ways to protect them, whilst maintaining your new partner financially.

It is of course a legitimate worry. How can you ensure you look after your new partner, while also protecting your children? A standard Will may not be enough, because there is always the possibility that after your death, your partner changes their Will. Consideration should then be given to the use of family trusts.

In a nutshell, a trust is simply an umbrella under which assets of any description sit. On top of the umbrella sit the trustees, these are people you trust and whose role it is to look after and manage those assets for the benefit of one or more beneficiaries. Trusts come in many shapes and sizes, but put simply, once an asset is held by trustees for the benefit of the beneficiaries, those assets cannot then be re-directed by a future Will. The beneficiaries can include the surviving spouse, children, grandchildren, charities etc. and in some cases can be very flexible. So how might this work in practice?

Let’s take an example. Fred and Jane have recently married, Fred having been widowed and Jane is divorced. Fred has 2 adult children; Jane has 1 child and this child now lives with Fred and Jane. Fred and Jane have pooled together sufficient capital and have each paid half towards the marital home, having previously sold their own properties. In addition, Fred has £500,000 in an investment portfolio, much of which he inherited from his first wife. Jane has savings of £50,000. Fred is about to retire, and he is going to be relying on his investment income as well as pension for income. Jane is still working but does not have much in the way of a pension.

Fred wants to ensure that if he dies, Jane will be able to stay living in the marital home, but he knows that she will not be able to afford it with her own income and savings. Jane is reliant on Fred to ensure that she is provided for if he dies. However, Fred also wants to ensure that his children receive his half of the property and his investment portfolio after his death.

A flexible life interest trust could be the answer. It could give Jane a right to live in the property for the rest of her life and receive the income from Fred’s investment portfolio. It could even give the trustees a discretion to pay Jane some of the capital in the trust should she need it. After Jane’s death, the trustees are directed to pay the capital assets to Fred’s children.

But while Fred thinks this is a great idea and instructs the legal adviser to go ahead on this basis, Jane is silently wondering how all this would affect her. How would she get access to money, would she have to ask the trustees every time she needed something? The problem is that Fred and Jane have not discussed this before, and Jane is somewhat hurt that Fred doesn’t trust her.

A few years’ later, Fred dies, and Jane does not think he has adequately provided for her and seeks advice. She decides to make a claim against his estate using the Inheritance (Provision for Family and Dependants) Act 1975, a statutory provision that allows for a Spouse, amongst others, to make a claim on an estate if the Will (or intestacy) does not make reasonable provision. This is often known as an ‘Inheritance Act Claim’ and can be extremely costly and time consuming, not to mention stressful and can of course adversely affect relationships within families.

In the multi-million-pound 2019 Court of Appeal case of Cowan v Foreman, the judge was very sympathetic to the widow, who had been left nothing in the Will. She was simply one of several potential beneficiaries in a Discretionary Trust and while the trustees had considered her needs, she felt humiliated. Even the house they had shared was a trust asset and she had no rights at all. Of course, not all trusts are set up like this, but there are lessons to learn.

Firstly, trust is key. Ideally, both parties to the relationship should be aware of the decision to include a trust in the Wills and this should be reviewed at regular intervals with your legal adviser. If necessary, allow time to think about and consider the impact on your partner before signing on the dotted line.

Finally, it goes without saying that obtaining sound legal advice is extremely important to ensure that you have thought of all options. Consideration of how the Will could be structured to avoid an Inheritance Act claim is something that we consider with our clients, especially those who are considering whether a family trust is right for them.

So, if you are thinking about how to protect your family, then our legal advisers can help you to make the right decisions for you. We look forward to helping you structure your Wills in the best possible way.

To arrange a complimentary initial consultation with one of our Later Living Legal Experts simply call us today on 0800 999 4437 or email enquiries@parfittcresswell.com. Due to the ongoing pandemic, we are also offering telephone and video conference calls should you not wish to meet face to face at this time.

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