Posted On / 16.03.2020

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

In 2007 the law changed so that the nil rate band could be transferred on the first death to the surviving spouse. Prior to the law change, any assets that were left to a surviving spouse 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 this mean that the nil rate band was lost and on the death of the survivor only their nil rate band of £325,000 could be used. Therefore from a tax planning point of view, it made sense for the first spouse to die to utilise their nil rate band, for example by leaving £325,000 to their children. This would mean that when the survivor passed away and used their nil rate band, between them £650,000 of tax free allowance would have been used.

However, a small problem with the above was that many married 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.

Under a nil rate band discretionary Will trust, the spouses would in their Wills arrange for £325,000 to be held on a discretionary trust on the first death. The potential beneficiaries of this trust would be the surviving spouse and the children. The residue of the estate would then pass to the survivor absolutely and qualify for spousal exemption from IHT.

Using the nil rate band discretionary Will trust meant that the nil rate band would be fully used, whilst as a potential beneficiary, the surviving spouse would still be able to access the money. As the surviving spouse would be likely to have been one of the trustees, this combined with a letter of wishes setting out that the surviving spouse was the primary beneficiary, meant that there were no concerns with preparing Wills in this way. 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.

Then is 2007 the law changed. The new law meant that the first spouse to die could leave all of their estate to the survivor and then on the survivor’s death they would be able to use their nil rate band and the nil rate band of their deceased spouse.

The change in the law meant that for some couples it would be easier and better form 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. Further, if on A’s death B wants to pass assets onto the children, B can make this as a gift from their own assets and as long as B survives the gift for 7 years it will not be taken into account for IHT purposes on B’s death.

If an individual dies and they still have a nil rate band discretionary trust in their Will, then in practice this does not really cause an issue. If desired, an appointment 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 and the entire estate will be spouse exempt.

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 can 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 property 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 Families
are changing and many will now be based around second marriages where there may have been children from previous marriages. In order to make sure that the needs of both spouses and their existing children are taken into account and balanced, many people may consider using nil rate band discretionary trusts in their Wills. This means that the trustees can take into account a wide range of factors 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, then £325,000 is ring-fenced and protected from use on care fees. The survivor can be named as a potential beneficiary so that they can still be given money if they need it, but otherwise the money is protected for the other potential beneficiaries.

When you are 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. We are able to offer telephone and videoconference meetings to take instructions regarding any legal matter. Please feel free to contact Lelsey Eveleigh, at lesley.eveleigh@battens.co.uk or 01935 846275 or any other member of the Private Client team, to discuss this further.

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