Discretionary trust - IHT and probate

73Jim

Hello

Hoping someone can advise please. This is the first time I’ve been involved in wills and probate and I’ve figured out most of it - just need a little more clarification to feel confident. Thanks!

We lost one of my much loved parents (Parent A) a couple of months ago. Parent A is survived by Parent B, who is the sole beneficiary in Parent A’s will. As their widowed spouse I understand there would be no IHT payable.

Parent A’s assets are £530k, with a further £250k in a discretionary trust which was set up over 5 but less than 6 years before their passing.

Question 1 - do we report the discretionary trust in the valuation of their estate which we need report before applying for probate? (Unsure as have read that it doesn’t count)

Question 2 - Parent B wishes to make a deed of variation to benefit myself and my sibling. There is £1,000 that needs to be deducted from Parent A’s eligible IHT free £325,000 due to a £7,000 gift made last year (no gifts made the financial year before, so £6,000 of the gift can be disregarded for IHT). I assume Parent B can therefore split the remaining £324,000 IHT free allowance between myself and my sibling. Do we need to make it clear that is from Parent A’s £530k assets and not their discretionary trust?

Question 3 - moving on to the discretionary trust. How do we deal with tax for this? I understand it hasn’t met the magic 7 year mark, but it is eligible for taper relief at the 5 year marker. If the full amount went to Parent B as widowed spouse, is there still tax to pay? If it is split between my sibling and I (as it was set up to benefit), I assume tax is paid at the taper relief rate.

Question 4 - what I am trying to get my head around is... is it therefore possible to use Parent A’s IHT tax free allowance of £325,000 from general assets for my sibling and I via deed of variation, and then in addition benefit from the taper relief on the £250k in the discretionary trust? The remaining general assets would transfer to Parent B.

Note - these questions are asked on behalf of Parent B, who is well off enough in their own right, but also as it happens has a life limiting illness. My sibling and I are devastated over losing Parent A and are not chasing payouts. Parent B wishes to make the most sensible, beneficial decisions following the letter of the law.

Parent B, sibling and I are joint executors and trustees of the trust.

Hope that is all understandable!

Dox

Sounds like some professional advice would be the best idea, particularly given the situation in respect of your surviving parent's health.

If you are instructing a solicitor, please help them by using conventional terms like mum/mother and dad/father rather than Parent A and Parent B. It would have been so much easier to follow your post if you had; and your instructions will be easier (and therefore cheaper) to deal with. 

Keep_pedalling

I am assuming that the discretionary trust was set up by the deceased parent, then the answer to Q1is yes it has to be reported as  money was gifted to the trust within 7 years.

Q2. As £251k  of his / her NRB has already been used up any DoV that passes more than £74k away to children will be subject to IHT. 

Q3. Taper relief only applies if gifts exceeded the NRB which was not the case here.