Ignoring Trusts in Wills: The dangers of do-it-yourself Probates

Probate is the general term given to the legal process of administering a deceased person’s estate, ensuring that their debts are paid and their assets are distributed according to their Will. It stems from the requirement for executors to obtain a Grant of Probate to access a deceased’s assets.

When there is no Will, the process is referred to as an Administration due to the requirement for personal representatives to obtain a Grant of Letters of Administration. The Grants are largely the same in effect and the terms ‘Probate’ and ‘Administration’ are often used interchangeably.

In the UK, this process can be completed in one of two ways:

1. Appoint a professional e.g. solicitor; or
2. Do it yourself (DIY)

Whilst at first glance, DIY Probates may seem like an ideal way to make the process cheaper, it’s crucial an executor understands their duties, and in particular the provisions of the Will and their legal ramifications.

This is most highlighted when a Will includes a Trust. Failing to properly address Trusts in a Will can lead to significant financial, legal and tax consequences down the line. We have seen countless examples of where the costs savings achieved by executors through not seeking professional assistance have been dwarfed in comparison by the costs of rectifying their mistakes.

Here, we explore some of the risks associated with ignoring Trusts in Wills – and explain why seeking professional guidance is crucial to ensuring the best possible outcome for all parties involved.

Understanding Trusts

A Trust in a Will is a legal arrangement whereby assets are held by nominated trustees on behalf of the intended future recipient(s) (referred to as the ‘beneficiaries’).

Trusts can be created for various reasons, ranging from protecting assets from being exposed to a beneficiary’s own adverse financial circumstances (e.g. divorce, long-term care, bankruptcy, inheritance tax etc), or providing for minors or vulnerable beneficiaries, to ensuring that the assets are not wasted after you pass away.

The types of Trusts frequently found in Wills include:

• Life Interest Trusts – This arrangement gives a beneficiary (often a spouse) the right to use or receive income from assets during their lifetime, with the capital subsequently passing to others (e.g. children) upon the income beneficiary’s death.
• Discretionary Trusts – This type of Trust grants the trustee the power to decide how and when beneficiaries receive their inheritance.
• Bare Trusts – These Trusts offer a simple mechanism for holding assets on behalf of a beneficiary who has an absolute right to them (in other words, with no stipulations or restrictions imposed by a third party).

It’s uncommon for Wills to identify the type of Trust using clear headings, or for them to provide much guidance in relation to how they are to be administered – and so much relies on the executor being able to decipher technical language that can often be quite confusing.

DIY Probate: what are the risks?

With different types of Trusts each carrying their own nuances, tax rules and legal implications, we always advise that individuals beginning the Probate process obtain guidance from a qualified legal specialist – even if the intention is to conduct the Probate yourself.

Even a minor oversight can have severe consequences for both executors and beneficiaries alike – and as such, attempting to navigate this complex legal terrain without expert support could leave you exposed to a number of risks, including:

Failure to recognise the Trust

Concerningly, one of the most common mistakes when taking the DIY approach to Probate is failing to identify that a Will contains a Trust in the first place – or most likely, an executor thinking they can simply ignore it.

Ignoring the existence of a Trust can lead to the unintended distribution of assets, potentially resulting in cumbersome legal disputes and financial losses. Tax and non-reporting penalties, as well as late payment interest, are also likely.

As is often the way, the cost to fix is far higher than the price to avoid.

Mishandling of tax implications

Trusts are subject to complex tax rules, with Inheritance Tax (IHT), Capital Gains Tax (CGT) and Income Tax being encountered most frequently.

Incorrectly handling the tax obligations of a Trust can lead to significant penalties and unexpected tax liabilities. For example, Discretionary Trusts are subject to periodic ten-year charges and exit charges, which can all-too-easily be overlooked by an inexperienced executor/trustee.

Breach of trustee duties

If an executor assumes the role of a trustee without understanding their obligations, they risk breaching their fiduciary duties.

Trustees must be in a position where they’re confident they’re able to act in the best interests of beneficiaries and manage Trust assets responsibly, complying with their statutory duties and those expressly stated in the Will.

Otherwise, they could be open to legal claims being made against them personally.

Subpar outcomes for beneficiaries

Whilst the vast majority of individuals taking the DIY route with the Probate process do so with the best of intentions, it’s nevertheless true that choosing this path may inadvertently disadvantage beneficiaries.

For instance, failing to establish a Life Interest Trust correctly could mean that neither the surviving spouse, or the intended beneficiaries on second death, receive the financial security intended by the deceased.

Similarly, it’s possible that discretionary beneficiaries could be denied their inheritance due to mismanagement of the fund.

Legal disputes and claims

Errors in handling Trusts can lead to costly legal disputes as beneficiaries who believe they’ve been improperly treated – or outright denied their entitlement – bring claims against the estate.

It’s important to note that the duty placed on an executor does not leave them until they have properly administered the estate. A Trust does not disappear simply because the executor erroneously chooses not to pay funds to it.

Instead, the Trust will continue to exist; waiting for the funds to arrive. In this scenario, for tax purposes, the Trust is deemed to hold the value it should have received and will be taxed accordingly – even if it’s laying dormant.

This means it’s quite possible for tax deadlines to be missed and for penalties and interest to be accruing in the background, ready to give a nasty surprise to someone down the line.

We see this commonly with old-style Nil Rate Band Discretionary Trusts where on first death, a Will makes use of IHT allowances that were, at the time, unable to transfer across to their spouse by placing into Trust the most they could leave without a payment of IHT becoming due.

As the Trust was not intending to deny the surviving spouse access to funds – and was purely incorporated for tax reasons – we have seen lay executors and trustees consider the fund as belonging to the surviving spouse, which led them to not undertake the formalities relating to the Trust. This typically causes a lot of problems when the surviving spouse dies.

It’s also important to note that, in some circumstances, executors can be held personally liable for rectifying mistakes in the event that an estate is incorrectly distributed.

Why choose professional support?

When dealing with complex Wills featuring Trusts, seeking assistance from a qualified and experienced solicitor can help you not only better understand the implications of the arrangements in place, but also overcome any issues or roadblocks that arise with confidence and clarity.

At Price Slater Gawne, our dedicated Wealth Protection team has decades of combined experience in dealing with all areas of Probate. Taking a personalised approach, our friendly team can help you:

• Identify and interpret Trust provisions correctly
• Advise on the legal and tax implications of different types of Trusts
• Assist with the correct administration of the estate and Trust
• Help mitigate risks and prevent costly errors
• Offer guidance to help protect against personal liability for executors and trustees

Put simply, no one knows estate administration like we do – and we’re here to help.

Speak to a member of the team today by contacting 03333 058375 or emailing WealthProtection@psg-law.co.uk to see how we can help you make a success of your Probate requirements.