Critchley Hall News
Discretionary Trusts - An Update
Notes on Wills containing a discretionary trust and the impact of the new provisions by H M Revenue & Customs to permit the transfer of the unused Inheritance Tax nil-rate band on a person's death to the estate of their surviving spouse who dies on or after the 09th day of October 2007.
Up until the 09th day of October 2007 the only way to ensure that the Inheritance Tax nil-rate band was not lost on death of the first spouse was to create a discretionary trust which would use the Inheritance Tax nil-rate band and permit the assets in the discretionary trust to be used by the surviving spouse.
This has changed from 09th day of October 2007 and it is now possible to transfer the Inheritance Tax nil-band rate from a deceased spouse to the estate of the surviving spouse; thus on the first death everything may be left to the surviving spouse in the knowledge that on the death of the surviving spouse there will be two Inheriance Tax nil-rate bands available.
What to do?
Option 1 - Unravel the Wills by making new Wills which leave everything to each other on the first death. For most people this is what the Wills would have provided were it not for Inheritance Tax concerns. It makes the administration of the estate on the first death very simple and inexpensive; there is no discretionary trust to report to H M Revenue and Customs to administer. The costs of new Wills are £150 plus VAT. It will suit those persons where the joint estate does not exceed the nil-rate band x 2.
Option 2 - Leave the Wills as they are. It does mean that on the first death the estate must be administered initially as an estate including a discretionary trust but it is possible to close the trust immediately and transfer the assets in the trust to the surviving spouse and it will be accepted by H M Revenue and Customs as if the estate had been given in its entirety to the surviving spouse. It leaves in place the other advantages of a discretionary trust. It 'ring fences' one half of your joint estate up to the Inheritance Tax nil-rate band. It is in trust and it does afford to the trustees a way in protecting it from claims of others. Examples are where the surviving spouse goes into care - the trustees can decide that the trust fund may not be used for these purposes. Another example is where the surviving spouse decides to make a new Will and give the entire estate to someone else - the assets in trust are protected from this change in heart. It preserves also to those with agricultural or business property the relevant Inheritance Tax reliefs.
(Reviewed February 2009)
What to do next?
Come and discuss the options with us; call our office on 01969 625526