Living trusts can be a powerful estate planning tool in the UK, offering privacy and efficiency by helping your loved ones avoid the lengthy probate process. However, trusts must be used strategically. Not all assets belong in a living trust, and including the wrong ones can create complications, tax liabilities, or other issues.
Here’s a guide tailored for the UK to help you understand which assets are better left out of your trust and how to handle them effectively.
Why Avoid Probate in the UK?
In the UK, probate is the legal process of administering a deceased person’s estate, including validating a will, paying off debts, and distributing remaining assets. While probate isn’t always as drawn-out or costly as it is in other jurisdictions like the US, it can still create delays, especially for larger estates or those with complex assets.
A living trust can bypass probate for certain assets, allowing quicker distribution to beneficiaries. It also ensures greater privacy, as probate records are public in the UK. However, some assets are better excluded from the trust. Let’s explore these.
1. Property with a Mortgage
Including property in a trust can complicate matters if the property is mortgaged. Lenders typically have strict requirements for transferring a mortgaged property into a trust, and failing to meet these could result in the mortgage becoming payable immediately.
What to Do Instead:
Consult with your lender to discuss transferring the property into a trust or use a transfer-on-death designation (if available). Alternatively, ensure the property passes directly to your heirs via a will, which can be quicker and simpler in the UK.
2. Jointly Owned Assets
In the UK, most jointly owned assets, such as property or bank accounts, automatically pass to the surviving owner(s) under the right of survivorship. Including these in a living trust is unnecessary, as they won’t go through probate.
What to Do Instead:
For jointly owned assets, ensure ownership is properly documented. If you want to override the default right of survivorship, you may need to create a declaration of trust or specify alternative arrangements in your will.
3. UK Pension Schemes and Annuities
UK pensions, including defined contribution and defined benefit schemes, typically bypass probate altogether. They are distributed directly to the beneficiaries you’ve nominated with your pension provider. Adding them to a trust may also create tax complications.
What to Do Instead:
Review and update the beneficiaries listed on your pension plan regularly. If you wish to exercise more control over how the funds are used, you could set up a separate family trust to manage distributions after your death.
4. ISAs (Individual Savings Accounts)
Including ISAs in a living trust can disrupt their tax-efficient status, as ISAs are exempt from income and capital gains tax during your lifetime. However, they do form part of your estate for inheritance tax (IHT) purposes.
What to Do Instead:
To minimise the IHT burden, consider gifting funds from your ISAs during your lifetime or using IHT-efficient investment options like an AIM ISA (which can qualify for business property relief).
5. Everyday Bank Accounts
Bank accounts used for day-to-day expenses or bills may create unnecessary complications if included in a trust. While placing them in a trust can avoid probate, it could restrict access for immediate needs, such as funeral expenses or bills.
What to Do Instead:
Opt for a payable-on-death (POD) or transfer-on-death (TOD) designation where available. Alternatively, ensure your executor or beneficiaries have access to sufficient funds through other means, such as a joint account.
Tailor Your Estate Plan for UK Laws
Estate planning in the UK requires careful consideration of tax implications, joint ownership rules, and probate laws. While a living trust is a valuable tool, it is not a one-size-fits-all solution. Ensuring your plan aligns with UK-specific regulations will help protect your assets and ease the burden on your loved ones.
How We Can Help
At Aristone Solicitors, we specialise in bespoke estate planning services, including wills, trusts, and probate solutions tailored to UK laws. Whether you’re looking to reduce inheritance tax, set up a trust, or simplify the probate process, our experienced solicitors are here to guide you every step of the way.
Contact us today to schedule a consultation and ensure your estate plan protects your legacy for years to come.
- Luton: +44 1582 383 888
- London: +44 2034 393 888
- St Albans: +44 1727 519 888
Alternatively, complete our online contact form, and one of our probate law experts will get in touch promptly to discuss your needs and provide tailored advice.
