Discretionary Trust - Run out of Headroom.

[harryhoundog]

Some two and a half years ago, I found myself as sole executor of the estate of a very elderly relative.

As such I was left a large proportion of the residuary.

Already a semi-retired pensioner, I had the time to sort out, what turned out to be a larger than expected estate, left in something of a muddle.

Not really needing the capital or income, and mindful of the possibility of my death creating another IHT bill, I had a solicitor draw up a discretionary trust deed, to take my place as residuary beneficiary, with my children as trustees and my grandchildren as the intended but not specified beneficiaries.
The deed was signed a couple of weeks before the second anniversary of the death.

So far so good BUT my continued sleuthing "Heir Hunter" style has turned up further assets belonging to the estate of the deceased.
This wealth is still under my control as executor. as I have only just found it.

This new situation will be reported to HMRC as a revision for IHT purposes, but I have a nasty feeling that I have now used up the "headroom" of what was intended to be a "nil rate band" discretionary trust.
Left as things are the trust is likely now to suffer regular IHT charges and be more difficult for my children to manage without clocking up professional charges.

Is there something the trustees can now do to reduce the total value of the trust to return it to "nil rate band" status; such as setting up modest extra trusts for the education of my pre-school age grandchildren?

[cliffordpope]

It used to be the case that if you set up different trusts on different dates than each had it own NRB. I think it helped if the beneficiaries were not all precisely the same.
You need an expert to comment on this.

[harryhoundog]

Any experts out there? Or posters with a similar "difficulty".

Unfortunately we are now well outside the two year deadline for the DOV.

Is the nil rate band the 312K limit as at the date of death or the 325K on the date of the trust's creation?

The trust received cash, as all the (then) assets were sold by the estate before the trust was created; there were some gains and some losses; presumably the trust value consists of the cash put into it?
It currently includes some accumulated income - this could be paid out pronto - if that would keep it below its upper limit despite the sudden increase in cash, it is likely to receive from the estate soon ?

[pqtaxation]

It is not clear why, as executor, you don’t speak to the solicitor who drew up the DoV for you – or another one specialising in trusts and estates if you’re not happy with that solicitor- to advise on this matter as well as on the amended IHT liability/account to be submitted to HMRC (without admitting negligence on your part as executor). Presumably HMRC regard the administration of the estate as incomplete.

It’s probable that the DoV had the effect of varying the will and so the trust was created from date of your elderly relative’s death. If so, the NRB would be the lower figure.

[maths]

It would seem (although you have not confirmed this) that you executed a Deed of Variation (DoV) with respect to your entitlement as sole(?) residuary beneficiary.

Under the DoV a discretionary trust was created and your complete entitlement was settled thereon. Te settlement was cash, the executors having sold assets qua executors.

You do not indicate the quantum of cash which was settled but appear to suggest that the new found assets if added to the trust will cause the value of the total trust assets to exceed the nil rate band.

Normally when a DoV is created it is "back-dated" for IHT and CGT purposes; however, this may or may not have been the case.

For CGT and income tax purposes you (not the deceased) are the settlor.

The newly found assets which fall into residue will automatically be settled on the discretionary trust as they will be covered by the DoV.

Assuming (even after the additional assets are settled) the trust's aggregate value is only marginally above the nil rate band (ie that applying at the date of death if the DoV was back-dated for IHT) the charge after 10 years is likely to be relatively small and the appointment out in the first 10 years to a beneficiary is also likely to be small.

Depending upon the exact amounts it is generally more IHT efficient to make use of a discretionary trust (maximum charge very 10 years 6%) compared to you retaining the property with a potential 40% charge on death.

[harryhoundog]

Many thanks maths, you have understood the situation almost spot on.

The estate is still open, in that HMRC has written to me twice saying in effect, this is all buttoned up, let us close the file.
I have written back saying "possibly not quite I'm still digging".

The family were of Scottish extract, though the estate, of which I am executor is in England. The formerly large family has migrated, and then done its bit for population control by turning into an inverted pyramid. In my generation I am the sole male. Also surprisingly the males have outlived their spouses and sisters, thus tending to import wealth from other families.

My investigations were more in the nature of genealogy, with the long shot that there might be some money involved.
Quite frankly I won't absolutely believe our luck, until the estate receives a cheque.
I don't want to start hares running until we know the precise figures involved.

The HMRC web site recommends that instruments of variation are likely to include this clause:
'The parties to this variation intend that the provisions of section 142(1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply.'
The DoV creating the trust includes the IHT clause but not the CGT one. I cannot quite remember why the CGT clause was left out, perhaps because the estate was thought to be completed and a minimal amount of CGT had already been paid. The estate then consisting of just cash.
Presumably the IHT clause back dates the trust's nil rate band to the 312K in force on the date of death, not the 325K at the date of trust creation?

If, when the exact amount of extra inheritance is agreed, the trust could then be classed as in excess of the nil rate band: Does it remain so until the 10 year review, or would there be scope for distributing some of the capital to beneficiaries to get back into the nil rate band?

Either way the burden is more one of extra administration, rather than significantly more tax take?

[maths]

The HMRC web site recommends that instruments of variation are likely to include this clause:
'The parties to this variation intend that the provisions of section 142(1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply.'
The DoV creating the trust includes the IHT clause but not the CGT one. I cannot quite remember why the CGT clause was left out, perhaps because the estate was thought to be completed and a minimal amount of CGT had already been paid. The estate then consisting of just cash.

As the trust received cash there was no necessity to back-date for CGT and hence no inclusion in the D0V, I suspect.

Presumably the IHT clause back dates the trust's nil rate band to the 312K in force on the date of death, not the 325K at the date of trust creation?

Correct.

If, when the exact amount of extra inheritance is agreed, the trust could then be classed as in excess of the nil rate band: Does it remain so until the 10 year review, or would there be scope for distributing some of the capital to beneficiaries to get back into the nil rate band?

Any calculation of the exit charge (ie if some of the trust capital is distributed) within the first 10 years of the trust is based on the amount in the trust immediately after the death (and also takes into account any chargeable transfers made by the deceased within 7 years prior to death; presumably nil); the first 10 year charge is based on the value of the trust at the 10 year point but also takes into account any chargeable transfers made by the deceased within 7 years prior to death and any exit charges made in the fist ten years.

In short, paying out monies in the first 10 years will not as such reduce the charge at 10 years.