How can I stop my spendthrift son frittering away his inheritance? Heather Rogers replies

My wife and I are tenants in common on our property, we have a will and we have a total of around £800,000 in cash and unmortgaged property.

My problem is this: I have one son who is married, but the other is a spendthrift and would quickly throw this hard-earned money in the trash.

I would like to give them enough in the will to pay off the balance of their mortgage and say enough to live on per year, with the clause that in case of a rainy day they can withdraw money for good reason.

Where could I look?

SCROLL DOWN TO FIND OUT HOW TO ASK HEATHER YOUR TAX QUESTION

Heather Rogers replies: If your beneficiaries are very young, or older but vulnerable, or if you are otherwise concerned about their ability to manage an estate, you may want to consider setting up a trust through your will: a will.

What is a will?

These are created through your will and detail how your estate will be managed and distributed upon your death.

They are useful for preserving a legacy to be passed on to future generations.

This usually involves appointing trustees to manage the assets transferred into trust.

Will Trusts allow you to pass on your assets while adding certain restrictions: who benefits from what and when.

How do trusts work?

There are different types of trusts you can create through your will. The three main types are as follows.

Bare Trust: Usually used for people under the age of 18.

Life interest trust: often used to grant the right to occupy a home or the right to receive income during a person’s lifetime, for example to protect a spouse.

Upon their death, the property is inherited by a third party, for example children.

I covered a specific use of this in my answer to a question from a previous reader – a property rights trust: My wife is afraid that if I die first, my children will sell our property against her wishes.

Discretionary trust: This is the type of will most commonly used.

These are intended to pass on an inheritance to young or vulnerable beneficiaries, or if there is other concern that someone may not be able to manage an inheritance.

A discretionary trust works exactly as described in the name.

It is flexible because the trustees you appoint to manage the trust will make the decisions about when and how the beneficiaries receive the assets or income.

When selecting trustees, it is important that you are confident that they will carry out your wishes.

You can leave a letter of wishes with your will, which can be more specific in your instructions.

What are the common reasons for setting up a will?

People may want to create a will to ensure that a minor child or grandchild does not inherit before a certain age, or to protect vulnerable beneficiaries who may need help administering their estate, or to provide for assets if the beneficiaries not being able to deal with the inheritance. an inheritance for another reason.

They can also help protect assets in certain situations, such as if a surviving spouse remarries and you are concerned about children being disinherited.

You can give the trustees the power to make decisions about who will need the money most in the future, rather than passing your entire estate equally to your beneficiaries.

How do you choose confidants?

The executors of the will are often the curators, but you can choose who you want.

It is both a responsible and often difficult role. All trustees must agree to any decision if there is more than one trustee.

It is often a good idea to have a lawyer or similar professional as one of the trustees as these are independent, but this is obviously to the detriment of the trust.

What about the tax consequences of setting up a will?

There are different tax implications for different trusts, but money transferred into a discretionary trust immediately after death is subject to estate taxes.

However, additional fees are charged because the assets held in trust will not form part of the beneficiaries’ estates for inheritance tax purposes.

Therefore, the transfer of assets from a discretionary trust to the beneficiaries will normally also trigger an inheritance tax exit charge.

This can be avoided if the assets are transferred within two years of death. In that scenario, no exit fees are payable as the transfer is deemed to have been made by the deceased in their will.

But another point to note is that the income tax and capital gains tax situation where assets are distributed by trustees in these circumstances may be different from the situation if outright bequests had been made instead.

Meanwhile, if the assets do not come out of the trust within two years of the date of death, estate tax exit charges apply.

Also, estate taxes will apply on each 10th anniversary of the trust’s creation.

These are complicated and Gov.uk has details about this how exit costs and inheritance tax are calculated.

Please note: if the estate is left to a discretionary trust rather than to direct descendants, unless the assets are transferred within the two-year period, there is a potential loss of the ‘residence nil rate band’ (see the box to the right ), which means that more inheritance tax is due on the estate.

What about the ongoing tax consequences?

The trust will need to be registered with the Trust Registration Service (TRS) and the trustees will usually have to complete an annual tax return and pay any taxes due – on income earned or the sale of assets.

This varies depending on the type of trust used. Bare trusts generally do not require tax returns, but they must still be registered with the TRS.

What else should you consider before creating a will?

Some trusts, especially discretionary trusts, can be quite expensive to manage (they can be active for up to 125 years).

If beneficiaries feel disadvantaged because they are dependent on trustees for their share, this can give rise to disputes and claims against the estate, which can be self-defeating.

In your case, since your estate is currently worth less than €1 million and would qualify for the zero rate band if the property or its proceeds were left directly to your descendants, your estate should escape inheritance tax, unless of course there is prior – death gifts to take into account.

In this previous column I explained the situation with gifts: My 86-year-old grandfather makes large cash gifts to relatives.

You can therefore lose the zero residence tax rate if the assets pass into a trust rather than to your descendants and survive for more than two years.

Since you also want to help with your sons’ mortgages, you can divide your assets directly between your sons and the trust to avoid losses on the zero-interest band.

However, you must then weigh up the ongoing costs of the remaining part of the estate and the benefits.

I suggest you talk to your sons first and then seek advice from a lawyer before making a decision.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic: tax laws, estate taxes, income taxes, capital gains taxes and much more.

If you’d like to ask Heather a tax question, email her at taxquestions@thisismoney.co.uk.

Heather will do her best to respond to your message in an upcoming monthly column, but she will not be able to reply to everyone or correspond with readers privately. Nothing in her answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a telephone number in your message that can be reached during the day. This number will be treated confidentially and will not be used for marketing purposes.

If Heather can’t answer your question, please do so Read here how you can get help with your taxes, including sources of free professional advice if you are older and/or on a low income.

You can also contact us MoneyHelper, a government-backed organization that provides free financial assistance to the public. The number is 0800 011 3797.

Here, Heather provides tips on how to find a good accountant, including when to seek help, hiring the right type of company, and typical costs.