A dilemma that many people face is how to provide for their spouse in their will while still ensuring their children receive their inheritance.
For example Joe has three adult children. He separated from their mother 15 years ago. He wishes to leave his assets to his children however wants to provide a home for his second wife Jane. Joe creates a testamentary trust over the home he shares with Jane to hold it for his children whilst granting Jane a life interest allowing her to live in the home for the rest of her life. Followings Joe’s death Jane decides she wants to live closer to her sister and the trust sells the house and buys a new house. There are no Capital Gains Tax (CGT) consequences on this transaction. However on Jane’s death the new house passes to Joe’s children and the transfer will be subject to CGT even if the property is not sold. Had Jane remained in the original home, rollover relief would be available.
The disposal of assets within a testamentary trust should be approached with caution as there may be unintended taxation consequences upon eventual transfer to the beneficiaries. Such outcomes can apply to other assets such as shares and investments as well as physical property.
While there are advantages of creating life interests and testamentary trusts via wills such as the creation of flexibility for the primary beneficiary, protection of assets and potential tax planning benefits, such endeavours should be discussed with legal and tax experts to ensure that the ultimate outcome is understood and planned for.