question about Nil Rate band discretionery trust will

seh567

About 7 years ago my husband and I made a will incorporating a Nil Rate band discretionery trust.. When the first spouse dies their assets will go into this trust fund. When we made the wills the Nil Rate Band was £250,I believe it is now £650 so we really do not need it now. However neither of our sons are financially secure and we would like to keep protected at least 50% as inheritence for them if either of us has to go into care. Currently our combined assets are the house £240k and approx £30k savings split between us. The beneficiaries are the surviving spouse, then two sons. The trustees are also the surviving spouse and two sons so effectively keeping it in the family. My question is. When the first spouse dies and their assets goes into trust then the surviving spouse will only have £15k savings. Would the trustees be able to draw on the trust for the other £15k to be transferred to the remaining spouse. Also what would happen if the survivor would like to move somewhere smaller but their share of the property fell short of the buying price, ie owns £125k but the smaller property cost £150k leaving a shortfall of £25k. Would they be able to draw money from the trust fund?

harryhound

The usual trick 7 years ago was to leave half the house to the kids or to set up a discretionary nil rate band trust.
Now that the tax allowance for IHT is transferable up to 100%, depending on how much of the estate of the first to die goes to the surviving spouse, it is more customary to leave an interest in possession trust to the surviving spouse (that is a life interest)to avoid the whole dual estate being at risk of being squandered or used up supporting (say) a case of dementia.

The usual trick with a discretionary trust is to LEND money to the surviving spouse. However a discretionary trust faces an income tax of 50% on all but the first 1000 of income if the interest is accumulated within the trust. There is also a burden of managing and accounting for the trust, like the small investment fund that it is.

This "Which?" book explains the options and all three books about the despatching part of life's hatching, matching & despatching could be useful:

http://www.amazon.co.uk/Giving-Inheriting-Which-Essential-Guides/dp/1844901181/ref=pd_sim_b_5

seh567

Would it be a good idea to rewrite our wills then given that the majority of our assets are tied up in the value of the house. We really don't want to spend another £700 pounds if this one is still sufficient and the surviving spouse would be able to get a loan to access the cash asset of £15k approx. I don't think there will be any interest to be taxed on the trust because the house will still be lived in by the surviving spouse so I guess there will only be money in the trust if the house is sold if the surviving spouse wants to live in a smaller property, say for instance if the house is sold for £240k that would mean £120k would go into trust and the rest for the surviving spouse. If the smaller property cost £150k they could borrow £30k from the trust leaving a cash balance of £90k. Are you saying the trust would have to pay 50% tax on this balance even though its below the IHT threshold?

getmore4less

£700 sounds a lot for a will

Think about will aid this year
http://www.willaid.org.uk/

who are executors?

Don't get confused by the 50% tax that's on any income retained in the trust, distributions get a tax credit for the tax paid ,for the recipient to use for their own tax returns.

seh567

Executives are remaining spouse & 2 sons.

We paid £700 for to mirror NRB Descretionery Trust wills 6 years ago.

Still not had questions answered. I don't think I fully understand how this type of will really works

John_Pierpoint

700 quid is expensive for a will BUT how much specification does it have about the discretionary trust it creates.
For example what is the limitation clause for the life of the trust ?

One way out of re-writing the will now, could be to do a Deed of Variation after the death, to make the will say what the beneficiaries then want it to say. Could be an expensive (several more hundreds?) way of doing it.
There could be a problem "busting the trust", if the beneficiaries of the trust are minors.

seh567

Hi, just checked the wills they were written in 2005. We actually paid £600 inclusive of vate for 2 x mirror wills (should have been £450 plus vat but I asked too many questions so they charged extra for their time), severence of joint ownership of our home and enduring powers of attorney.

Not sure what you mean about limitation clause but the trust period starts with the date of death and ends either 80 years later or on an earlier date as my Trustees shall by deed specify.

If my husband dies first I am happy for his share of the property to go into trust and pass on the total value to my 2 sons (both adults) when I die and this is the terms of the trust will. There is a letter of wishes attached to the wills that distributes the savings assets so effectively the only asset going into the trust will be a 50% share of the property we own and live in. On first death there will be no monies to set up a trust but I need to know what happens if I sell the house and move somewhere smaller. The house is currently worth £240k of which 50% value would be available to me to re purchase, however would I be able to use some of the trust value if the repurchase is above my availability. Also at this point there would be a cash value after this transaction so would a trust then have to be set up and the monies invested or could it just be distributed to the beneficaries, ie myself and my 2 sons?

As you can see from my questions I just can't seem to get my head round all of this so would rather just scrap this will if its going to be too complicated to administer. My only concern if I scrap it is that I would not be able to protect 50% value of the home if the surviving spouse had to go into care at some point. Not sure about deed of variation because I am happy about the line of beneficaries but am more worried about the scenario previously mentioned if the house was sold.

Since setting up these wills we were sent drafts and the originals remain with the solicitors. I guess this is because they could then persuade us to use them to get grant of probate and give us advice about the discretionery trust. I know it makes sense to use a solicitor upon first death but I am reluctant to use this particular firm of solicitors because I don't think they explained the wills initially when first set up and I suspect they will charge a fortune especially as indicated by replies the wills where expensive. Would I be within my rights to request the original from them now so I can make an informed decision when the time comes without feeling obligated to use them?

Sorry about the long reply but we want to make the right decisions whilst we are still able to.

John_Pierpoint

Just to be brief:

You have had the full package: will - trust - power of attorney - advice - will storage, hence the cost.

My question about the life of the trust was to check that you must have (say) more than 10 pages of trust rules.

When you set out to avoid 40% IHT tax you have to review the situation regularly as both your circumstances and tax legislation changes.

In the last 6 years there have been at least 4 changes that you might need to consider.

The period of accumulation has increased to 124 years.

2006 The taxation of trusts was extensively changed (you proposed trust may well have incorporated these changes).

2007 Persons in a legal union got the ability to transfer up to 100% of the nil rate band for IHT to the surviving partner currently giving the combined estate £650K tax free when 100% of the estate of the first to die has been left to the partner.

2010 The income tax on accumulated income within the trust increased to 50% for all but the first £1000.

The key word in your proposed trust is "discretionary" - the trustees can do almost anything with the assets of the trust, including making a loan to the surviving partner.

When it comes to "downsizing" - I am not sure about the CGT treatment of a house half owned by the discretionary trust, but as the acquisition price gets reset to probate valuation, this should not be a major concern.

It is generally a good idea to review a will every 5 years - I am surprised that solicitors don't seem to review the wills they are holding automatically .

I have had dealing with three solicitors in the last few years, so I understand your misgivings:

1. High street and pretty hopeless.

2. Good but expensive and arrogant [Leave it all to us it never works when the family think they can do some of the probate work]

3. Competent and prepared to work on a fee basis - hopefully they have got the answers to my limited queries correct. Time will tell.

Hang on to the Enduring power of attorney, as the modern equivalent "Lasting Power of Attorney" is a bureaucratic night mare and requires fees to be paid when the paperwork (pages of it) is created.

Review the will and see if an "interest in possession" (life interest) trust holding half the house would mkes more sense now. It counts as leaving the assets to the spouse for IHT purposes.

Getting the will out of the solicitor's office, is just a matter of going to collect it. Ask for a couple of certified copies too in case of loss and to show to organisations that want to check that the executor is indeed the executor, prior to the grant of probate.

kidmugsy

It may be a mistake to focus on inheritance tax if your real worry is Social Services. I can see that you want to be confident that half the house is safeguarded from them in a trust.

You also want (1) to understand what the house-selling and -buying options are when one of you is widowed. I also suggest that you need to know (2) how the trustees should manage the ownership of half a house. Is there another reader here with enough expertise or experience to help on points (1) or (2)?

seh567

Hi John
Very informative information you have given me so many thanks for that. It is a descretionary trust and in the will there are the following sections:-

1 ) Appointment of Executors, 2) Funeral Wishes, 3 to 3.3.3) Legacy of Personal Chattels 4 to 4.12.2) Legacy of Nil Rate Band on Discretionary Trust (this is the largest section) 5) Transfer to my trustees 6) Residuary Gifts 7) Survivorship conditions 8) Extended Power of Maintenance 9) Extended Power of Advancement 10) Professional Charges 11) Disclaimer 12 to 12.3) Trustees Powers. Then there is a schedule entitled Administration Powers with sections 1) No Duty to Consult 2 to 2.13) General Powers 3) Power to Amend Administrative Provisions.

I didn't realize that some goverment changes have occured since we had the wills written but the one I am most concerned about is the 2010 The income tax on accumulated income within the trust increased to 50% for all but the first £1000. Not sure what this means but I am guessing that there won't be any income whilst the surviving spouse is still living in the house but any monies left over after selling and moving to a smaller property would be subject to 50% tax? If it given as a loan to beneficaries rather than invested into the trust would this avoid 50% tax? No really sure what counts as INCOME in this scenario. There are no bonds or stocks & shares only share in the marital house and small amount of savings in ISAs.

I will certainly make sure we have the original wills & certified copies in our possession but now I have the worry of finding another solicitor I can trust to ensure they are up to date.

Hi Kidmugsy

You are spot on as I don't need to worry about inheritance tax as we certainly won't have assets over the limit. Points 1 & 2 is exactly what I would like more information on so hopefully another reader can help going forward.

John_Pierpoint

A poster with much more practical experience of the workings of the tax system than I have, called Jimmo, has posted this link on the way that deeds of Variation and the resulting trusts work:

http://www.hmrc.gov.uk/cto/customerguide/page21.htm#6

Night time reading?