Nil Rate Band Discretionary Trusts
Philip Evans, Head of Graham & Rosen's Trusts Department discusses Discretionary Trusts.
A popular way to save Inheritance Tax in the 2000s was to create a Will that left assets up to the Inheritance Tax nil rate band to a discretionary trust on the death of the first spouse. Any remaining assets then usually passed to the surviving spouse. Their use declined in popularity after October 2007 when the Government introduced the transferrable IHT nil rate band, which allowed a married couple to leave up to £650,000 worth of assets without paying IHT.
If both spouses are currently alive, we often get asked whether it is necessary to retain the discretionary trust. This depends on individual circumstances. From an IHT point of view, if a couple's assets are comfortably within the double nil rate band of £650,000, then it might be safe to revert to more traditional Wills leaving all assets to the surviving spouse on the first death. But sometimes clients wish to retain the trust if they are worried about paying care home fees or they wish to retain flexibility about disposing the trust assets on the first death.
If the first spouse has already died and the trust has been set up, but the surviving spouse is still alive, then trustees need to be aware of two things. First, an IHT tax return has to be completed every 10 years if the value of the trust assets exceeds 80% of the nil rate band (currently £260,000) even if the trust assets are worth less than £325,000. Secondly, if the trust includes a property which is occupied by a beneficiary, then the trustees should carefully document that they have permitted the beneficiary to occupy the property in order to secure valuable Capital Gains Tax benefits.
Lastly, if a trust was created on the first death and the surviving spouse has now died, then you need to legally wind up the trust. Typically there will be default and optional beneficiaries, but depending on how the trust is worded, often a Deed of Appointment is required to terminate the trust and to transfer the trust assets to the beneficiaries.
As trusts can be complicated and individual circumstances differ, you need specialist advice.
For further information, please contact the Head of Trusts, Philip Evans, at Graham & Rosen's Hull or Cottingham Offices.