When considering how to manage your estate, the subject of probate often arises. For many, the idea of avoiding probate is attractive due to the associated costs, delays, and public nature of the process. One method often discussed is the use of trusts, including an Interest in Possession Trust (IIPT). But can this type of trust help you avoid probate entirely?
At Blackstone Solicitors, we provide expert legal guidance on estate planning and probate matters to individuals and families across England and Wales. This article will explain what an Interest in Possession Trust is, how it operates, and whether it can help you sidestep the probate process.
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What Is Probate?
Before exploring trusts, it’s essential to understand probate. Probate is the legal process of administering a deceased person’s estate, including validating their will (if there is one), paying debts, and distributing assets to beneficiaries.
While probate is necessary for many estates, it can be a time-consuming and costly process. Additionally, the probate process is a matter of public record, meaning the details of your estate may become accessible to others.
What Is an Interest in Possession Trust?
An Interest in Possession Trust is a specific type of trust that gives a named beneficiary, known as the life tenant, the right to receive income from the trust’s assets during their lifetime. However, they do not own the underlying assets themselves, which are preserved for another set of beneficiaries called the remaindermen.
For example:
- You create an IIPT and transfer a property into it.
- Your spouse (the life tenant) receives any rental income from the property.
- Upon their death, the property is passed to your children (the remaindermen)
How Does an Interest in Possession Trust Work?
An IIPT involves three key parties:
- The Settlor: The person who creates the trust and transfers assets into it.
- The Life Tenant: The individual entitled to benefit from the trust’s income during their lifetime.
- The Trustees: Those responsible for managing the trust’s assets in the best interests of the beneficiaries.
The life tenant does not own the trust assets, nor can they dispose of them. This separation of ownership is central to understanding the probate implications of an IIPT.
Does an Interest in Possession Trust Avoid Probate?
The answer depends on several factors, including when the trust is created and how the assets are held.
- Assets Transferred During Your Lifetime
If you transfer assets into an IIPT while you are alive, those assets are no longer part of your personal estate. This means they will not be subject to probate upon your death.
For example, if you transfer a house into an IIPT during your lifetime, the trust owns the property, not you. Upon your death, the trustees continue managing the property for the benefit of the life tenant, without the need for probate.
- Assets Transferred Through a Will
If the IIPT is created in your will, the assets you want to place into the trust are still part of your estate at the time of your death. In this case, those assets will need to go through probate to enable the transfer into the trust.
Key Considerations When Using an IIPT to Avoid Probate
While an IIPT can help you avoid probate for certain assets, it is not a universal solution. Here are some factors to bear in mind:
Timing
The timing of when the trust is established is crucial. To avoid probate, the trust must be set up during your lifetime, and the assets you wish to protect must be transferred into it before your death.
Costs and Complexity
Setting up an IIPT involves legal fees and administrative responsibilities. Trustees will also have ongoing duties, including managing the trust’s assets and complying with tax obligations.
Control
Once assets are transferred into the trust, they are no longer legally yours. This loss of control can be a concern for some individuals. Trustees will have the legal authority to manage the trust, so it’s important to choose reliable and capable trustees.
Tax Implications
IIPTs have specific tax rules that must be considered:
- Income generated by the trust’s assets is taxable as part of the life tenant’s income.
- Transferring assets into a trust during your lifetime may trigger inheritance tax (IHT) or capital gains tax (CGT), depending on the circumstances.
It’s important to seek professional advice to fully understand these implications and ensure your estate planning strategy is tax-efficient.
Benefits of Using an Interest in Possession Trust
Despite the complexities, there are several advantages to using an IIPT in your estate planning:
- Avoidance of Probate
As explained, transferring assets into the trust during your lifetime removes them from your personal estate, thus avoiding the need for probate.
- Asset Protection
The trust structure provides a layer of protection for the assets, ensuring they are preserved for future beneficiaries. For example, assets in an IIPT are generally not accessible to creditors of the life tenant.
- Flexibility for Beneficiaries
An IIPT allows you to provide for multiple beneficiaries. For example, you can ensure a spouse receives income for life while protecting the capital for children or other family members.
Alternatives to an Interest in Possession Trust
While IIPTs can be effective in certain situations, they are not the only method of avoiding probate. Depending on your goals and circumstances, other strategies may be more suitable:
- Joint Ownership
For certain assets, such as property or bank accounts, holding them in joint names with a right of survivorship means they pass directly to the surviving owner without going through probate.
- Payable-on-Death (POD) Accounts
Certain financial accounts can be set up with a POD designation, allowing them to transfer directly to a named beneficiary upon your death.
- Discretionary Trusts
A discretionary trust offers greater flexibility than an IIPT, as trustees can decide how and when to distribute income and capital among beneficiaries.
Choosing the Right Strategy
Estate planning is not a one-size-fits-all process. The best approach depends on your assets, family dynamics, and financial goals. While an Interest in Possession Trust can help you avoid probate for certain assets, it must be part of a well-thought-out estate plan.
At Blackstone Solicitors, we offer personalised advice tailored to your specific needs. Our team has extensive experience in trust creation, estate planning, and probate matters across England and Wales. We’ll help you navigate the options and ensure your wishes are carried out efficiently and effectively.
Conclusion
An Interest in Possession Trust can be a valuable tool in estate planning, offering benefits such as avoiding probate for certain assets and providing financial security for loved ones. However, it is not without its complexities, and it may not be the right solution for everyone.
To explore whether an IIPT is suitable for your circumstances or to discuss other estate planning options, contact Blackstone Solicitors. Our expert team is here to guide you every step of the way.
How we can help
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of dealing with trusts. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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