Discretionary Will Trust vs Life Interest

[insertnamehere]

Hi everyone

I'm looking at the following scenario. An individual will inherit £800,000 from her husband on his death.

The objective is to save IHT on her later death but also to protect against care home fees for her in future. Saving IHT is the priority.

Can the couple sever the joint tenancy on their property and leave the husband's share (of £225,000) into a discretionary trust through his Will? If so, could the wife continue to live in the property and yet it be excluded from her estate on her death? Further, would the share of the property held in the trust be disregarded for care home fees?

A discretionary trust looks better in terms of saving IHT on her death but the life interest trust seems better used for protection from care home fees (my understanding is that her interest under the latter would be included in her estate on death).

Is it an either/or argument or am I missing something?!

Many thanks in advance.

[pqtaxation]

Yes, spousal interests in marital home can be changed in the way you mention, the deceased’s share may be settled into their will trust (either relevant property discretionary or immediate post death interest IPDI for lifetime of surviving spouse) that allows surviving spouse to live there and later downsize. The assets settled into either types of trust are not assessable by a council for the purposes of means tested payment of care home fees.

But you’re missing something as since introduction of transferable nil rate band (TNRB) in 2007 will trusts settled by first to die have become much less important in marital estate planning, from the point of view of mitigation of IHT on death of surviving spouse, though nil rate band discretionary trust wills executed prior to that introduction in 2007 generally do not need to be revised. As husband has an estate of ca £800k, comprised of his £225k share of family home and therefore a balance of £575k of other assets, it is sensible for the spouses to take professional advice specific to their circumstances.
That adviser will want to know the value and composition by asset type of the estate of both spouses. To the extent that the combined marital estate exceeds two (if neither spouse has survived more than one spouse at date of death) NRBs (currently £650k) IHT may be payable on second death depending on possible reliefs that for some types of assets.

The relevant property discretionary trust does remove the assets from the surviving spouse’s estate but uses the deceased’s NRB so reduces available future TNRB. The IPDI keeps the assets within the surviving spouse’s estate for IHT purposes but uses no NRB of deceased spouse because of spousal exemption -- though as a downside the TNRB could be ended in future but as a positive the Tories could in future increase NRB to £1m; principal private residence relief for capital gains tax applies to whole house if sold when surviving spouse downsizes or has to enter into care.

Hence for a combined estate valued over £1m it is only sensible to take specific, tailored professional advice!!!

[insertnamehere]

Thank you for such a considered and comprehensive reply.

It helps a great deal.