‘Probate Trusts’: Avoiding The Probate Process

Malcolm Finney looks at how it might be possible to circumnavigate the need for probate.

Probate is not only potentially costly, but it also means that there is an inevitable delay in the beneficiaries under a deceased’s will inheriting. Typically, distribution of the deceased’s assets by executors to beneficiaries may not take place for at least a year following death, and in the more complex cases a number of years later. 

Probate is required whether the deceased left a will or died without making a will (i.e. died intestate). Probate is simply the process whereby the executors/administrators receive their authority to act and the validity of the deceased’s will is established.

So, is it possible to avoid this process?

By settling (i.e. transferring) assets in lifetime on such a trust means that on the death of the settlor (i.e. the person who settles the assets), probate is not required with respect to the trust assets. This is because the assets no longer form part of the settlor/deceased’s estate, but are held by trustees for the trust beneficiaries. 

A discretionary trust is the most flexible of trusts, and the trustees are able to adjust to changes in the circumstances of the beneficiaries when deciding who and how a particular beneficiary is to benefit under the terms of the trust. For example, the settlor may have three grandchildren to whom he would like to leave part of his estate under his will. However, he has no idea as to how their respective circumstances may vary in the future. By transferring assets into trust (and not leaving them under the will) and including the grandchildren as beneficiaries, the trustees will in due course be able to benefit the grandchildren according to the extent to which they may need help.

Ideally, there should be a minimum of three trustees (one of whom may be the settlor), so ensuring on the settlor’s death the trust will not be without trustees.

In terms of the assets to settle, surplus cash, joint life last survivor policies, single premium bonds together with other liquid investments are perhaps attractive, and may alleviate any possible capital gains tax charges. Illiquid investments may be less attractive for trustees (e.g. buy-to-lets, businesses). 

The bare trust, although often mentioned as a means of permitting probate to be avoided, is not totally effective in this regard. A bare trust is a trust under which the trustee(s) hold the trust assets for the beneficiary(ies) absolutely; it isn’t a trust in the same way as a discretionary trust, as the trustees have no discretion as to how to act (they must follow the orders of the settlor/beneficiary). The trust property belongs absolutely to the beneficiary(ies), not the trustees. As a consequence, on the death of the settlor/beneficiary, the bare trust’s assets form part of the deceased’s estate, and hence probate needs to be obtained before the executors can make distributions to those inheriting.

Nevertheless, a bare trust may be useful where, for example, the settlor/beneficiary has taken out a life policy on his/her own life. Although, as indicated above, the life policy proceeds on the settlor’s/beneficiary’s death would form part of the deceased’s estate for probate purposes the bare trustees (as legal owners of the policy) can, pending probate, receive from the life insurance company the policy proceeds (the proceeds can then, if necessary, be used to discharge any inheritance tax liability on the deceased’s estate).

Perhaps one of the most important ways in which probate is readily and easily avoidable is for assets to be owned as joint beneficial tenants (not tenants-in-common), such as the family home and bank accounts. As beneficial joint tenants, on the death of one of them, the survivor automatically inherits under the principle of survivorship, without any need for probate. 

Whilst it may be possible to avoid inheritance tax charges on property in the trust (using the deceased’s nil rate band), capital gains tax charges may arise on assets settled (hence why cash (for example) is an attractive asset to settle).

Given the myriad of factors affecting an individual’s estate, tax and non-tax, a holistic approach to any death planning is to be recommended. But consideration of a discretionary probate trust should always be considered