Do I HAVE to set up a Nil Rate Discretionary Trust

Fly_Guy

My dad died a couple of weeks ago and I am dealing with his estate which is worth around £200k and is passing straight to my Mum. So no IHT issues are envisaged now or in the future when my mum goes and passes this on to my sister and I.

However, as was the fashion in 2005, my Dads will specifies the setting up of a Nil Rate Discretionary trust (NRDT) which at the time was a tax efficient way to deal with IHT issues.

However, given that the law has now changed, I find myself as an executor and trustee of a will that specifies a trust that is unneeded and unwanted. A trust that will take time and expensive professional help to set up and then to wind down again. Having spent most of yesterday trying to get my head round the situation it looks as if the money spent on getting a complex will drawn up was a complete waste - dying without a will would have been so much easier !

My question is do I HAVE to set up the trust fund in the first place ? Can this clause just be ignored or alternatively revised via a deed of variation ?

If we DO have to set up a NRDT how does this happen ? (ie. is there a standard form I can fill in) or will I need professional help ? Also, how do you get rid of it again ?

Any feedback much appreciated.....

Many thanks

FG

antrobus

Fly_Guy wrote: »

.... Can this clause just be ignored or alternatively revised via a deed of variation ? ....

A deed of variation would certainly work. Ignoring it would probably work too, on the basis that no one's going to sue you if you do.

Fly_Guy

antrobus wrote: »

A deed of variation would certainly work. Ignoring it would probably work too, on the basis that no one's going to sue you if you do.

Many thanks... I must admit that ignoring it is the option I was most drawn to !

However, might the failure to set up a trust be queried by the probate office when they get to see the will ?

FG

purple_haze

A deed of variation would only work if all the beneficiaries of the discretionary trust can be identified, are over eighteen and agree to it – which is unlikely as most NRB discretionary trusts will have spouse, children and further issue (including children yet unborn) as discretionary beneficiaries.


However, the matter is simply sorted by way of a deed of appointment by the trustees in which they appoint the trust fund to your mother, either outright or on a life interest trust (which would ringfence your father's estate against your mother's remarriage or from paying her care fees if she were to go into residential care). This effectively closes the trust down and preserves the transferable nil rate band for inheritance tax in full.


I think you'd need to get a solicitor to draw up a deed of appointment. If you don't want to incur the expense, your father's executors can simply transfer all assets to your mother, but the transferable nil rate band for inheritance tax would probably not be available on your mother's death, as H M Revenue and Customs would be able to argue that the first £325k of your father's estate went into trust and no action was taken by the trustees to get it out of the trust (to a certain extent this will depend on the precise wording of your father's will).


If your parents' combined estates are under £650,000 I suppose inaction is an option, as there may be no need to preserve the transferable nil rate band.

Fly_Guy

Many thanks for this - I hadn't appreciated the 'under 18' complication wrt a deed of variance.

Regarding the 'deed of appointment' I understand that this is a sensible way to wind up the trust (between 3-24m after death) but the step that I think I am having problems understanding is the trust setup in the first place.

Does a trust 'appear' at the moment of death (if specified in the will) and instantly gain the various assets automatically or is there some kind of formal setting up and asset transfer process that needs to be done (and them immediately undone via the deed of appointment).

If it just 'appears' then does it need to be registered somewhere ?

And yes, the entire estate of both my late Dad and my Mum combined is unlikely to be anywhere near £650k.

Sorry for these straightforward questions ! I thought this should be easy enough that I could help out my Mum and just deal with it. It looks like I'll need some professional help after all...

FG

agrinnall

I would agree with your final sentence. The consequences of getting this wrong could be pretty expensive, so it would be better to spend a relatively small amount of money now to make sure it's handled correctly than face an unexpected bill some years down the line.

John_Pierpoint

For what it is worth my better half has recently been through a similar situation.
The trustees (ie the two children) appointed the chunk of wealth back to their mother, interest free.
Mum duly died a few years later, and in our case the discussion is about topping up the trust to the current nil rate band for IHT (£325k), probably in the interests of the great grand children. (Provided the politicians don't turn sterling into a third world currency - Argentina style).

Obviously the death of the widow meant the amount tucked up in the trust came off the former husband's transferable nil rate band - but as this rate has been stuck at £325k for several years there was no gain of loss from this situation.

Personally I am not sure about the situation of breaking the discretionary trust, if there are beneficiaries younger (or perhaps still in the "bump" phase) as the trust will have been designed to last for years (80 something years?).

It is definitely worth spending a few hundred with a knowledgeable solicitor, to make sure you get the legalities and tax liabilities correct.

I am a fan of the "interest in possession trust" as sadly the discretionary trust tends to get taxed as though it was one of those really rich individuals in the 45% income tax band, paying 28% CGT on almost all of any of its gains. These rates of tax make it very difficult to preserve the real value of its investments.

Let us know what conclusions you arrive at.

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

Lots of other slightly bewildered people here:

http://www.taxationweb.co.uk/forum/trusts-and-estates-f12.html.

xylophone

http://www.ts-p.co.uk/uploaded/publications/information_sheets/Wills_and_Sucession/Nil_Rate_Band_Discretionary_Trusts_in_Wills_for_Spouses_or_Civil_Partners.pdf

Assuming that it a lump sum of cash that would go into the trust, the trustees could make an immediate interest free loan of the money to the widow to be repaid (index linked up to date of repayment) from the estate on death/when her house is sold etc?

But before setting up any type of trust, take advice from a suitably qualified solicitor. http://www.step.org/

Fly_Guy

Many thanks for the various links and advice above. Its clear that I will need to speak to a professional and will do so. Presumably AFTER I file for probate...

Can anyone confirm whether a NRDT in these circumstances is generated automatically on death or if it is a construct that needs to be actively set up ?

Regarding the various options of keeping the trust, my understanding is that my Dad wanted all the money to go to Mum, and ultimately to the children, in as tax efficient a way as possible. Given that this now happens essentially 'by default' (for an estate of this size) I dont think Mum will want the ongoing stress or expense of running a trust fund.

After all, its her money and if she wants to spend it all thats her choice and not something my sister or I should get involved in.

I'll check with her first though....

Thanks,

FG

xylophone

http://www.colemans.co.uk/docs/iht_tnrb_and_nrbdt-v18.pdf
Have a look at page 4 which might be relevant.

Savvy_Sue

Fly_Guy wrote: »

Many thanks for the various links and advice above. Its clear that I will need to speak to a professional and will do so. Presumably AFTER I file for probate...

There is nothing to stop you talking to a professional before you file: we had the same situation, and sorted it via a Deed of Variation, which we discussed with a STEP accountant long before we were ready to file.