Discretionary nil-rate trusts

[ifr]

Hello all,

I'm looking for some advice, please. I am going to consult with a solicitor but I'd like to an idea of how the land lies before that consultation, and to be able to think through what questions I need to be asking, rather than going in dumb.

Dad died 2008. His will contained a discretionary nil-rate trust, which made my mum and the three children trustees. We effectively regarded everything in the estate as mum's, and took nothing from it.

Later that year, my mum started correspondence with a solicitor to wind up the trust (on his advice, to move to the simpler transfer of dad's unused nil-rate band). However, she became critically ill and remained so until the end of last year, when she died. I do have written evidence (letter to solicitor) of her intent to wind up the trust, but doubt that will count for anything.

The trust was never wound up. Her will is a mirror of dad's. The estate is likely to be about 40k over the 325k threshold. I am now unclear whether:

- we're stuffed, and because the trust wasn't wound up we now have to pay IHT on anything over the 325k

- the trust actually still provides the protection it was intended to, and so we won't have to pay any IHT (in which case, why did the original solicitor advise Mum that she had to wind it up).

All a bit confusing for me, and I would really appreciate any insight.

Thanks in advance for any responses.

[pqtaxation]

...The trust was never wound up. ... The estate is likely to be about 40k over the 325k threshold.

I am now unclear whether:

- we're stuffed, and because the trust wasn't wound up we now have to pay IHT on anything over the 325k

- the trust actually still provides the protection it was intended to, and so we won't have to pay any IHT (in which case, why did the original solicitor advise Mum that she had to wind it up).

All a bit confusing for me, and I would really appreciate any insight.

You write that you will be seeing your parents’ solicitor who can speak and advise to the specific circumstances. You admit you’re confused so can I ask what were the value of your father’s estate and its disposition in 2008 (presumably some £300k of it went to the discretionary trust (DT) and the balance to our mother) and the expected value of your mother’s estate (including what is left of the balance inherited from your father) ignoring the value of assets held in the DT?

The general background is that discretionary will trusts were used prior to 2007 to utilise the nil rate band (NRB) of the first spouse /civil partner CP to die which otherwise could be unused/wasted. However from Oct 2007 the transferable nil rate band was introduced so that if after then the first to die leaves his/her entire estate to surviving spouse then when that surviving spouse/CP dies that latter’s death estate has two NRB’s (currently £650k) available to it (one of the latter surviving spouse and one from the first to die spouse).

In essence, the two spouses/civil partners now have 2 NRB’s to share between them irrespective to when they die. Whereas pre-Oct 2007 even when first to die left everything to spouse the last to die still only had one NRB; hence it was preferable to mitigate IHT payable for first to die to leave assets to the value of his NRB to discretionary trust (which used up his NRB but in practice trustees only gave income/capital to surviving spouse).

From the summary you have given it was likely (but by no means certain) that when your father died in 2008 his will was written to create a discretionary trust (DT) for the above pre-October 2007 reason. The solicitor probably advised your mother after his death to execute a deed of variation to your father’s will, or to otherwise end the discretionary trust, within two years of his death with his entire estate passing to her so that she would be in the post-October 2007 situation of having 2 NRBs available to her estate on her death - sadly her own death was probably thought not expected at that time to happen so quickly and there was also an expectation that the NRB would be increased significantly in value – in fact it is frozen at its 2009/10 value of £325k probably until at least 2015 in view of the deterioration of government finances.

[ifr]

Thank you, that's very helpful. I wasn't going to use my parents' solicitor, as I'd rather be able to have face to face discussions and they lived some way away.

My father's estate was half the house and half of almost all of their various bank accounts etc which were all in joint names, and probably totalled about 200k. It all went into the trust. mum's estate will be the trust, plus about 200k for her half of the house etc.

You're right that dad's will (written in 2007) had a discretionary trust, and I think that winding this up with a deed of variation is what the solicitor advised, so the two NRBs were available on her death.

As that didn't happen, we were under the impression that we would only have mum's NRB (£325k) and would therefore be liable for IHT on the balance of the estate (between 50 and 75k) because that deed of variation was never done, but I am wondering whether the original trust set up in Dad's will would still give us some element of protection (as the amount that went into the trust on his death was less than the NRB for him at that time).

[pqtaxation]

.... My father's estate was half the house and half of almost all of their various bank accounts etc which were all in joint names, and probably totalled about 200k. It all went into the trust. mum's estate will be the trust, plus about 200k for her half of the house etc.

As that didn't happen, we were under the impression that we would only have mum's NRB (£325k) and would therefore be liable for IHT on the balance of the estate (between 50 and 75k) because that deed of variation was never done, but I am wondering whether the original trust set up in Dad's will would still give us some element of protection (as the amount that went into the trust on his death was less than the NRB for him at that time).

No (see bold italicised underline above) -- Mum's taxable estate on her death will exclude the value of the assets held on trust.

Mum's estate will have only one NRB to offset against her own assets (i.e. excluding those assets held in the discretionary trust created by your father's will on his death).

But to be clear, why don't you recite the asset values I asked for in my first post above.

[riccardob]

Do these discretionary wills have to have the word "discretionary trust" specified?
The reason I am asking is that my family may be in the OP situation.

My parents have a will which states "I give devise and bequeath all my property both real and personal
whatsoever and wheresoever ("my property") to my trustees UPON EXPRESS tTRUST to sell call in and convert
the same into money with the statuory power to postpone sale being exercisable at their discretion UPON
TRUST for my wife......absolutely but if she shall die before attaining an absolute vested interest in my residuary estate then the same
shall be held upon trust for my said son...."

Does the above will mean that the NRB cannot be transferred?

Thanks