If your estate will pass to adult children, it is worth pausing to consider what happens to that inheritance once it leaves your hands. Divorce, financial difficulty, or simply the wrong relationship at the wrong time can erode wealth that took a lifetime to build. Will trusts offer a way to pass on your estate with protection built in – not just for your children, but for their children too.
This article draws on a real planning scenario to walk through the options available and the trade-offs involved.
The Scenario
A divorced client with a property worth approximately £200,000 and savings and other assets of around £272,000 – a total estate of roughly £472,000 – has two married adult children. She has two distinct concerns.
First, she wants to protect the property during her own lifetime in case a new partner were to move in. Second, she wants to ensure that what she leaves behind is protected from any future divorce proceedings affecting her children.
These are two separate problems, and it is important to address each on its own terms.
What a Will Can and Cannot Do
A Will only takes effect at death. It cannot protect your estate while you are alive.
If a new partner were to move into the property during the client’s lifetime, Will planning would offer no remedy. A partner could potentially acquire or assert a legal interest in the property while the client is living – and a Will has no power to prevent that. Neither can it stop a partner from bringing a claim under the Inheritance (Provision for Family and Dependants) Act 1975 after the client’s death.
Lifetime protection is a separate conversation that typically involves cohabitation agreements or declarations of trust. Once that is understood, the focus shifts entirely to what happens after death – and here, Will trusts offer meaningful options.
The Four Approaches to Distributing the Estate
1. Outright Gifts to the Children
Leaving the estate directly to the children is the simplest route. It is straightforward to draft and easy to administer.
The drawback is that it provides no meaningful protection once the assets have been inherited. At that point, the money and property become the children’s personal assets, fully exposed to:
- Divorce and relationship breakdown
- Creditor claims and personal insolvency
- Business failures
- Inheritance tax on the children’s own estates
- Pressure from others to use the funds in a particular way
For some families, simplicity is the right call. For others, the risks are too significant to ignore.
2. A Discretionary Trust for the Whole Estate
A discretionary trust is generally the most protective structure available. The estate passes to trustees – often the children themselves, alongside a professional trustee – who hold the assets for a defined class of beneficiaries. That class will typically include the children, grandchildren, and future descendants.
No single beneficiary has a fixed entitlement. The trustees decide when to distribute, how much to distribute, and to whom. That flexibility is its strength. Where a beneficiary is going through a divorce, facing creditor pressure, or navigating personal difficulties, the trustees can choose to delay, lend rather than give, or apply funds for a beneficiary’s benefit without placing assets into their direct ownership.
In the context of divorce, this structure is more protective than an outright gift – but it is not immune. The family court has wide powers and may take account of a beneficiary’s trust interests, the likelihood of future distributions, and historic patterns of benefit. A trust retained carefully by independent trustees, guided by a clear Letter of Wishes, offers the strongest position available – but no structure is entirely divorce-proof.
The inheritance tax complication: A discretionary trust falls within the relevant property regime for inheritance tax. This means the trust may incur IHT charges on every tenth anniversary and when capital leaves the trust. There is also an important interaction with the Residence Nil Rate Band.
The RNRB – currently £175,000 per person – is only available where a qualifying residential interest passes directly to descendants. A discretionary trust does not qualify at the point of death. However, under Section 144 of the Inheritance Tax Act 1984, if the trustees appoint assets out of the trust within two years of death, that appointment is treated as if it had been made by the Will itself. This allows the RNRB to be claimed retrospectively – but it requires the trustees to act within a tight window, and the Letter of Wishes should address this explicitly.
3. A Life Interest Trust Sized for the RNRB
An alternative approach focuses primarily on tax efficiency. Rather than placing the whole estate into a discretionary trust, the Will can create a life interest trust for the children over exactly enough of the property to use the RNRB – in this case, £175,000. The remainder of the estate would pass outright to the children.
A life interest trust of this kind is classified for inheritance tax purposes as an Immediate Post-Death Interest (IPDI). The life tenants – here, the children – are treated as owning the trust property for IHT purposes, which means:
- No ten-year anniversary charges apply
- No exit charges apply while the life interest continues
- The trust assets are taxed as part of the life tenant’s estate on their death
In this scenario, £175,000 of the property sits within the IPDI trust, and the remaining £25,000 of property value along with the £272,000 in other assets passes to the children outright. The trust element is protected; the outright element is not.
4. A Combined Structure
The combined approach uses both trust types within the same Will:
- A life interest trust for the children over the £175,000 share of the property needed to use the RNRB
- A discretionary trust for the balance of the estate – the remaining property value and all other assets
This structure achieves both goals simultaneously. The RNRB is preserved without requiring trustees to make a time-sensitive appointment within two years of death. The full remaining estate is protected by the discretionary trust. And the children receive income from the life interest trust, which keeps them connected to the estate without giving them direct ownership of the capital.
One practical note: because the children receive income from the IPDI trust, the trustees should retain overriding powers and underlying discretionary provisions to restrict entitlement where circumstances change. This maintains flexibility.
The trade-off is complexity. This structure takes more time to draft and more time to administer than either a simple discretionary trust or an outright gift. That cost should be weighed honestly against the protection it provides.
The Letter of Wishes
Whatever structure is chosen, a Letter of Wishes written alongside the Will is essential.
A Letter of Wishes is not legally binding – the trustees are not compelled to follow it. But it is one of the most important documents in any trust arrangement, because it gives the trustees a clear view of your intentions and priorities in plain language.
It allows you to explain who you trust, who you are concerned about, and how you would like the trustees to exercise their judgement. If a discretionary trust is used and the trustees need to act within the two-year window to secure the RNRB, the Letter of Wishes is the place to give them unambiguous guidance on how to do so.
Which Structure Is Right for You?
The right approach depends on your own circumstances – the size and composition of your estate, the needs and vulnerabilities of your beneficiaries, and how much weight you place on simplicity versus protection.
What this scenario illustrates is that Will trusts are not a one-size-fits-all solution. They require careful thought, clear drafting, and honest conversation about what you are trying to achieve. The good news is that they work – and when they are set up well, they can protect family wealth across generations.
If you would like to explore what a Will trust structure could look like for your own estate, get in touch with Peter Maxwell-Lyte at MaxLyte Financial. As an introducer agent for The Will Company, Peter can arrange expert Will drafting and trust planning guidance tailored to your situation.
MaxLyte Financial Ltd acts as an introducer agent. Will writing and trust planning services are provided by The Will Company. This article is for informational purposes only and does not constitute personal financial or legal advice. Your circumstances will affect which options are appropriate for you.
