Understanding Probate Trusts: What Are They and Who Are They For?
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When considering how best to pass on wealth, many people focus on inheritance tax (IHT) planning. However, tax efficiency is only part of the equation. Equally important is ensuring your assets can be accessed quickly and efficiently by your loved ones after you die. This is where probate trusts can be especially useful.
In this blog, we explore what probate trusts are, how they work, and the types of clients who may benefit from them – including those with potentially no IHT liability.
What Is Probate?
Probate is the legal process of proving a Will and granting permission for executors to administer the estate. In England and Wales, when someone dies with assets in their sole name – such as bank accounts, property, or investments – a grant of probate is usually required before those assets can be accessed or transferred.
The probate process can take several months, or even longer in complex cases. During that time, the deceased’s assets are effectively frozen. This can create financial difficulties for loved ones, particularly if there are bills to settle, funeral costs to pay, or tax due on the estate.
What Is a Probate Trust?
A probate trust is a type of discretionary trust, usually set up during the lifetime of the individual (the settlor), into which assets can be placed with the aim of removing them from the estate for probate purposes – but not necessarily for IHT as the main driver.
The trust is usually designed so that the settlor retains access to the income or benefits of the asset during their lifetime, but crucially, the asset is legally owned by the trustees. On death, as the asset is not in the settlor’s sole name, it does not require probate.
Assets typically placed in probate trusts are Investment bonds, but other non-income producing liquid assets may also be held. Importantly, the trust must be set up properly and administered correctly to ensure its effectiveness.
How Does It Help?
The main benefits of a probate trust are:
Faster Access to Funds
Since the trust assets are not part of the deceased’s probate estate, the trustees can access the funds immediately following death. This can be invaluable for:
Covering funeral costs
Paying debts or household bills
Providing short-term financial support to family
Settling an expected IHT Bill (if applicable), enabling the wider estate to be administered
Avoiding Probate Delays
The average time to obtain probate in the UK is currently around six to nine months, depending on complexity and HMRC’s processing times. Probate trusts bypass this delay entirely for the assets held within them.
Privacy
A grant of probate is a public document, so the details of the estate, including its value, become public. Assets held in trust remain private.
Control and Flexibility
The settlor usually appoints trustees they trust, often family members or professional advisers, who can exercise discretion over how and when the funds are distributed.
What About Inheritance Tax?
This is a common area of confusion. Probate trusts are not primarily an IHT planning tool.
In most cases, particularly where the settlor retains access to the funds or income, the assets in the trust will still be included in their estate for IHT purposes. However, the key advantage remains the liquidity the trust provides upon death – a practical solution even where no IHT is payable.
That said, probate trusts can still support broader IHT strategies, such as:
Providing liquidity to pay the IHT due on the rest of the estate allowing the estate to be released
Funding premiums on a life assurance policy designed to cover IHT
Who Are Probate Trusts Suitable For?
Probate trusts can benefit a wide range of clients, including:
Those with modest estates: Where there’s no IHT expected, but the client wants to ensure their loved ones can access money quickly after their death.
Clients with complex estates: Those with overseas assets, family businesses, or multiple properties, where probate might be delayed or complicated.
Single individuals or widows/widowers: Who hold assets in their sole name and want to avoid placing an administrative burden on their family.
Clients concerned about liquidity: Even where life assurance or pensions form the main estate, having a separate pot of accessible capital is often wise.
Practical Considerations
Before recommending or establishing a probate trust, it’s important to:
Review your overall estate plan and Will
Ensure you understand the implications, especially if access to capital is retained
Choose suitable trustees
Use appropriate wording and trust structure, therefore professional advice is essential
There are also tax reporting obligations, particularly if the trust is classed as a Relevant Property Trust. You should be aware of potential charges such as the periodic charge or exit charge where applicable.
Furthermore, as a discretionary trust, it is treated as Chargeable Lifetime Transfer and therefore the amount you can place into the trust without incurring an immediate lifetime tax charge needs to be reviewed.
Conclusion
Probate trusts are a practical and flexible planning tool, particularly when the priority is to avoid probate delays and give family access to cash quickly. While they are not primarily designed to reduce IHT, they can still play a helpful supporting role in wider estate planning.
In short, probate trusts can offer peace of mind, allowing you to leave your affairs in good order and reduce the administrative burden on your loved ones at an already difficult time.
If you’d like to explore whether a probate trust could form part of your own estate plan, feel free to get in touch.