My Will has a nil rate band discretionary trust in it, should I change it?

What changed in 2007?

In 2007 the law changed so that the nil rate band could be transferred on the first death to a surviving spouse or civil partner. Prior to the law change, any assets that were left to a surviving spouse or civil partner were exempt from Inheritance Tax (IHT). This is still the case now, but before the law changed, if the entire estate was left to a surviving spouse or civil partner, this meant that the benefit of the nil rate band was lost and on the death of the survivor only their own nil rate band of £325,000 was available to be used. Therefore from a tax planning point of view, it made sense for the first spouse or civil partner to die to utilise their nil rate band, for example by leaving £325,000 to their children. This way, by each person utilising their own nil rate band, a total of £650,000 per couple could potentially pass tax-free to non-exempt beneficiaries such as children.

However, a small problem with the above was that many couples simply couldn’t afford to leave £325,000 to their children in the first instance. Because of this, the nil rate band discretionary trust because a popular way for Wills to be prepared.

What is a Nil Rate Band Discretionary Trust?

A trust is essentially a gift with strings attached in which assets are managed by trustees for the benefit of beneficiaries. Under a Nil Rate Band Discretionary Will Trust arrangement, the spouses in their Wills would give the nil rate band amount of £325,000 to be held on a discretionary trust on the first death. The potential beneficiaries of this trust would typically be the surviving spouse or civil partner and their children or other family members. The residue of the estate would then pass to the survivor absolutely and qualify for spousal exemption from IHT.

Using a Nil Rate Band Discretionary Will Trust meant that the nil rate band was fully used, whilst as a potential beneficiary, the surviving spouse or civil partner would still be able to access the money if the trustees exercised their discretion in their favour. As the surviving spouse or civil partner would be likely to have been one of the trustees, this combined with a letter of wishes setting out that the surviving spouse or civil partner was intended to be the primary beneficiary, meant that this generally worked well to provide for the surviving spouse or civil partner while maximising tax benefits.

Indeed, many trusts would operate on the basis that the trust assets would be loaned to the survivor interest free for their lifetime. This meant that the survivor would for practical purposes be able to use the trust assets as if they were their own.

The impact of the 2007 law change

Then in 2007 the law changed. The new law meant that if the first spouse or civil partner to die did not utilise their nil rate band, it could be transferred on to the survivor.

The change in the law meant that for some couples it would be easier and better from an IHT point of view to remove the Nil Rate Band Discretionary Trusts from their Wills and leave everything to the survivor on the first death. For example, if A and B are married and A dies first leaving their entire estate to B, A’s estate will benefit from the spousal exemption and on B’s death there would be two nil rate bands available.

If your Will still includes a Nil Rate Band Discretionary Trust

If an individual dies and they still have a Nil Rate Band Discretionary Trust in their Will, then this does not necessarily have to cause an issue. If desired, an appointment (ie a distribution) can be made of the nil rate band out of the trust to the surviving spouse within 2 years of the death so that it is read into the Will for IHT purposes. The entire estate will then be spouse exempt.

Do you still need a Nil Rate Band Discretionary Trust?

Whilst you may want to consider updating your Wills to remove the Nil Rate Band Discretionary Trust, there are some circumstances where you may wish to keep them.

Vulnerable beneficiaries
If there are vulnerable beneficiaries who you want to receive the benefit of your estate but they may not be able to manage large sums of money on their own, then a Nil Rate Band Discretionary Trust is worth considering. The trustees will have control of the trust fund and manage it for the beneficiary. Further, if a beneficiary is in receipt of means tested benefits then their entitlement to these benefits is protected by using a discretionary trust. Otherwise the beneficiary may lose their entitlement to benefits if they inherit a lump sum.

Assets likely to increase in value
If your estate contains assets that are likely to increase in value then if these assets are put into a discretionary trust any increases in value will be kept out of the estate of the beneficiary. Further, for assets that qualify for 100% business relief or agricultural property relief from IHT then it may be advantageous for these assets to be placed into a discretionary trust.

Modern family dynamics
Many families include children from previous relationships. In order to make sure that the needs of both spouses or civil partners and their existing children are taken into account and balanced, many people may consider using il Rate Band Discretionary Trusts in their Wills. This means that the trustees can take into account a wide range of factors in deciding how to use the trust fund, and ensure that money passes to family members as and when it is needed.

Care Home fees
If there is a concern about the impact of Care Home fees on the estate of the survivor, then it may be worth considering using a Nil Rate Band Discretionary Will Trust. As the nil rate band passes to the trust and not to the survivor directly, £325,000 is ring-fenced and protected from being taken into account in the financial assessment for care fees. The survivor can be named as a potential beneficiary so that they can still receive money if they need it, but otherwise the money is protected for the other potential beneficiaries.

Next steps

When considering making a Will there are a number of factors to consider and at Battens we can help discuss all of these with you to ensure that your Will reflects your wishes and is suited to your particular circumstances. We are able to offer telephone and videoconference meetings to take instructions regarding any legal matter. Please feel free to contact Leanne Routledge, based in our Yeovil office, or any other member of the Private Client team based in our other offices to discuss this further.