Can they be challenged?
Every individual should be assumed to have mental capacity unless proven otherwise. If the question arises over the validity of a will or a trust due to lack of mental capacity it is much simpler to prove capacity (or lack of it) of the settlor of a trust, since it is more likely to be challenged during their lifetime. A will however is much more likely to be challenged after death when proving the capacity (or lack of it) of the testator could be difficult.
It is not only the validity of a will that could be challenged. It might be that the chosen beneficiaries of the estate do not require or want the money or property left to them, or it could be that a dependant who was written out of the will challenges this and provisions are forced upon the estate:
Deed of variation – a legal document which can be utilised where a person has received an asset via a will or intestacy, but the person would like to vary how they benefit or redirect who (an individual or a trust) benefits from the asset. Amongst other formalities the variation must be executed within two years of death.
Provision for family and dependents – unlike civil law jurisdictions where people are expected to provide for certain relatives on death, referred to as Forced Heirship, there are generally no rules which provide a family member with an automatic right to someone’s estate on death in England and Wales. An individual can apply through the Courts under Inheritance (Provision for Family and Dependents) Act 1975 where the deceased did not make reasonable financial provision for them. This could lead to someone receiving money from the estate against the will of the testator. A recent example of this is Ilott v Mitson (2015).
A trust on the other hand is a private document so anyone written out of the trust is unlikely to know about it to challenge it. This is not saying someone couldn’t challenge a trust on lack of mental capacity or because it was created under duress, but it is less likely to be successfully challenged just for someone being unable to benefit from it.
Jurisdiction of property
Estates containing property in more than one country have historically created problems in that the location of the property (its situs) often means that the laws in that country dictate how it is dealt with. The outcome could be that succession law in the country dictates who the property goes to even if the will of the deceased stated something to the contrary.
There has been some improvement in this area though. New EU succession regulations came into effect from August 2015 which confirm that the default position for someone’s estate is the law of the country in which the deceased has their habitual residence at the time of death will apply and will govern the succession of the whole worldwide estate.
People will however be able to opt for the laws of the country of their nationality (or one of their nationalities if multiple) to apply to their estate instead by properly setting this out in their will.
It is important to note however that these regulations deal with the laws of succession only i.e. who inherits the assets of the estate. It does not deal with any tax matters, including inheritance tax. National law will continue to determine how inheritance tax is calculated and whether it is the estate or the beneficiary who is liable for the payment of the tax.
The UK has actually opted out of this law, however it will impact many UK expatriates living in EU countries who can choose to have UK law apply to their estate in Spain or France for example.
Both wills and trusts can be used for Inheritance Tax (IHT) planning. The scope of tax planning in wills is restricted to simply directing assets as efficiently as possible using available exemptions e.g. spouse exemption. Trusts, however, enable significant planning opportunities as they allow lifetime gifts to be made prior to death and if 7 years pass between date of gift and death then the trust property (assuming the settlor didn’t reserve a right to the money) will not be included in the inheritance tax computation. Loan trusts and Discounted Gift Trusts are further examples of trusts where the settlor can make a gift, but still receive certain benefits.
Often tax planning within a will is too late and therefore trusts are a much more appropriate form of IHT planning if people are in the position to give up their property.
Both wills and trusts have their role to play in IHT, succession and estate planning and often are used in conjunction with each other. You can also find that they cross over to the extent that a trust is created within a will at the point of death, particularly when minors are concerned.
In the scenario of a minor inheriting from an estate, statute dictates that the minor can’t accept the property inherited before they attain18, therefore an implied trust is created until this age. Alternatively it could be that the testator felt 18 was too young to receive the property left to them and they might feel 21 or 25 is more appropriate. Again a trust is created within the will to cater for this scenario.
A lifetime trust could do exactly the same thing in such a scenario. However, if created in advance of death it could also reduce or avoid IHT.