Considerate support will setting up a will trust arrangement

In the UK, everyone has a tax-free inheritance allowance called the nil-rate band, which is currently £325,000. 

For married couples or civil partners, any unused allowance from the first to die can be transferred to the surviving partner. 

This means the survivor could potentially have up to £650,000 tax free before inheritance tax is due. 

However, this rule does not apply to unmarried couples.

Liferent arrangements are a flexible way to look after someone while also planning for the future. They can cover both heritable property (land or buildings) and moveable property (everything else, including investments or business interests).

A liferenter is able to enjoy the benefits of the property or assets during their lifetime. This might mean receiving income from investments, dividends from shares, or simply having the right to live in a home. You can also set conditions, for example if the liferent ends on remarriage or moving into long-term care.

By default, a liferent lasts for life and no rent is payable. To avoid any confusion, it’s a good idea to specify in the Will or trust who will look after costs like insurance, maintenance, and other expenses. This way, everyone is protected and cared for.

For Inheritance Tax purposes, a liferenter is considered to benefit from the property or fund, which means it will be included in their estate when their estate is assessed for tax.

The good news is that a liferent in a Will doesn’t use up the nil-rate band of the first spouse to die (unlike a Discretionary Trust). This means the surviving spouse could still have up to two nil-rate bands available when they pass away.

Because tax rules and allowances can change, it’s wise to review your Will from time to time to make sure it still reflects your wishes and makes the most of any available tax reliefs.

Another way to plan your estate is by including a discretionary trust in one or both Wills. This type of trust usually has three trustees and can include a number of potential beneficiaries, such as a surviving spouse, children, or other relatives.

One of the key advantages of a discretionary trust is its flexibility. No single beneficiary has a guaranteed share - instead, the trustees decide who benefits and how much. They can be guided by a “memo of wishes”, a personal note from you explaining how you would like your estate to be used. While the memo isn’t legally binding, it helps trustees carry out your intentions. Trustees can give assets outright, place them in further trusts, or even provide liferents.

For tax purposes, the trust is treated separately, which can help manage Inheritance Tax. If the trust’s value is within the nil-rate band (currently £325,000), there’s no extra tax. Even if it exceeds that, the maximum rate is just 6%. The first spouse can “use up” their nil-rate band, leaving the second spouse with their own £325,000 allowance, and the trust can include property as well as other investments.

Trustees have discretion over who benefits and when. For example, they could give the whole estate to the surviving spouse if that seems best, guided by the memo. Loans can also be made from the trust to beneficiaries, with an “IOU” recorded. If the loan isn’t repaid before the surviving spouse passes away, the amount goes back into the trust, helping to protect the estate for the next generation.

Discretionary trusts are a smart way to look after your loved ones and your family’s future, while keeping things flexible and secure.

You can actually use both liferents and discretionary trusts for different parts of your estate, depending on what works best for your family. Many clients like liferents because they feel more certain from the start, rather than leaving decisions to trustees. Liferents also allow the nil-rate band of the first spouse to remain intact, so the surviving spouse can benefit from double the allowance - currently up to £650,000.

Liferents can be made more flexible by giving trustees the power to make advances from the assets, for example if the liferenter needs extra income or support. It’s often about finding the right balance between protecting your estate for the future and making sure the liferenter - usually a spouse or long-term partner - as enough for their needs.

If a liferent is created over a share of a house, it can even be carried forward to a future property. This means the surviving partner can move to a home that better suits their needs in terms of location, size, or lifestyle. Discretionary trusts, on the other hand, generally offer even more flexibility in how assets are managed and distributed.

It’s important to consider the inheritance tax position of each option carefully. Trusts can be helpful in many situations, especially if you want to protect assets for your children, plan for a spouse who might remarry, or safeguard your estate against care costs in the future. At the same time, your Will can be kept as simple as you like — it’s all about choosing what works best for your family.

Even if you decide not to use liferents or discretionary trusts, it’s useful to understand all the options so you can make the most informed choice for your estate planning.