...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.