I am a single parent and have an adult daughter who is thinking of getting married in the next two years. I would like to draw up a will and protect my assets in case my daughter goes through a divorce. I would like everything to stay in the family, going to my daughter and then her children. What kind of trust or will enables me to do this?
Sarah Jane Boon, partner at law firm Charles Russell Speechlys, says yours is a common concern for parents who want to protect family assets and ensure that these pass down their bloodline on their child’s own death, if they remain married.
You should write a will that creates a discretionary trust of your assets on your death. This is the most protective trust as no beneficiary is entitled to anything from it. It is up to the trustees’ discretion as to who should benefit from the trust’s assets and income, when and how.
You could, however, set out what you would like the trustees to do in a non-binding letter of wishes. This is where you could explain that the trust is primarily intended to benefit your daughter and any of her children. You may name other potential beneficiaries in your will, as well as detail anyone who should be excluded — in this case, your daughter’s spouse.
You will need to think carefully about who the trustees should be; usually they would be the executors of your will, but they do not have to be. The trustees could include your daughter, but there should be at least two and you may prefer her not to be one of them.
As the discretionary trust will ensure that your daughter is not strictly entitled to anything from the trust on your death, in the event that she were then to get divorced, it would not be possible for her spouse to argue that she had a guarantee of anything from it.
Although your letter would say that your daughter is to be considered the primary beneficiary, it should also say that the trustees should have regard to her matrimonial position — including whether a divorce is imminent — when deciding whether to distribute assets to her.
When the discretionary trust is created there is a window of two years from your death in which the trust could be restructured. Your letter could say that during this period thought should be given to whether an entitlement to income should be conferred on your daughter. If it were, then that would create a “life interest” trust. That may be simpler to administer but it would put the assets into your daughter’s taxable estate.
Whether the trust remains discretionary or becomes a life interest one, its assets will not pass under your daughter’s will on her death. Instead, they will remain held on the terms of the trust created by your will, thereby held for her children. Accordingly, your daughter’s spouse would receive no interest in your assets on her death if they remained married.
Ian Dyall, head of estate planning at wealth manager Tilney, says there is no trust that guarantees 100 per cent protection in the case of divorce, however, there are two types of trust that you could consider: a discretionary trust or an interest in possession trust.
A discretionary trust has a number of potential beneficiaries, which could include your daughter and her future children. There is no automatic right for any beneficiary to receive income or capital from the trust. It is left to the discretion of the trustees as to who can benefit, when and from what, for example, an income or a capital sum.
As the beneficiaries have no entitlement to the trust’s proceeds it is difficult for any creditor or spouse of a beneficiary to demand money from the trust in the case of divorce or bankruptcy of a beneficiary. The discretionary trust therefore probably offers the greatest protection of the trust’s assets if your daughter subsequently divorces.
The disadvantage of the discretionary trust is that if you leave your home into one of these, even if the only possible beneficiaries are your daughter and grandchildren, the property will not qualify for the inheritance tax residence nil rate band allowance.
The residence nil-rate band is currently £175,000 so it potentially reduces any inheritance tax liability by £70,000. If you have inherited an additional residence nil-rate band from a late spouse the saving could be as much as £140,000. Discretionary trusts are also potentially liable to a small inheritance tax charge — less than 6 per cent — every 10 years, and as capital leaves the trust.
The other option is to create an interest in possession trust using your will. An interest in possession trust has at least one beneficiary who is entitled to any income produced, or the right to live in any property if the trust owns a property.
On that beneficiary’s death the capital is usually paid to a different group of beneficiaries, potentially your grandchildren. These are known as the “remaindermen”. If this type of trust is created immediately on death it is known as an immediate post death interest (IPDI) and the assets in the trust form part of the life tenant’s estate.
For the purposes of the residence nil-rate band the property is therefore seen as being inherited by the life tenant and would therefore allow your executors to make use of any residence nil- rate band allowances you have available.
In the event of divorce, the only thing your daughter is entitled to is the income from the trust, which would therefore be taken into account, but it would be difficult for the divorcing husband to demand a share of the trust assets.
The best option for you will depend on the size of inheritance tax on your estate, whether the residence nil-rate band will be unavailable for other reasons and the relative importance of protecting the money from divorce versus saving inheritance tax.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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