Discretionary Will Trust Disaster

KaMaHu

In 2002 when my parents made their will they were advised to set up a discretionary will trust. The way that was presented to us was to protect the half of the deceased parent's estate. So half the estate was held for us to inherit and we wouldn't be required to use it to pay for nursing care for the remaining parent and dividing the estate would avoid inheritance tax. I think. 
In 2010 when my father died the solicitors helped my mum enact that trust - even though there was no need because my Dad's half of the estate was valued at £319k so under the threshold to pay inheritance tax. 
Our understanding of the trust was just that half of Mum's money was 'in the trust' we didn't understand that it needed to be put into separate assets. We had at that time very little idea of what money my Mum had beyond the value of their house and the vague understanding that they'd saved quite a lot. 
We were instructed to hold board meetings which we minuted - but the meetings went 'so we won't change anything' ok. No one told us that the trust had to have fixed assets. 
Now the probate solicitor of my Mum's estate is saying 'WTAF is this?'. 
We can't ignore the trust, even though there were never any declared assets in it. It's complicated by the fact that Mum made substantial gifts to us 'with Dad's money' but basically from her accounts. So there could be capital gains tax to pay on money given to me towards my mortgage which was a sort of 'the money's just resting in my account' deal, where it offset my mortgage whereas in Mum's account it wasn't earning much. 
So even though the joint estate in total would be below the inheritance tax threshold, because we don't have any assets in the trust we might end up paying inheritance tax on quite a chunk of money. 
I think my Mum was badly advised by her solicitor and I think we overestimated her understanding of what was going on. But none of this cut much ice with the probate solicitor. 
Does anyone have experience of a similar story that had a happy ending? 

Marcon

KaMaHu said:

In 2002 when my parents made their will they were advised to set up a discretionary will trust. The way that was presented to us was to protect the half of the deceased parent's estate. So half the estate was held for us to inherit and we wouldn't be required to use it to pay for nursing care for the remaining parent and dividing the estate would avoid inheritance tax. I think. 
In 2010 when my father died the solicitors helped my mum enact that trust - even though there was no need because my Dad's half of the estate was valued at £319k so under the threshold to pay inheritance tax. 
Our understanding of the trust was just that half of Mum's money was 'in the trust' we didn't understand that it needed to be put into separate assets. We had at that time very little idea of what money my Mum had beyond the value of their house and the vague understanding that they'd saved quite a lot. 
We were instructed to hold board meetings which we minuted - but the meetings went 'so we won't change anything' ok. No one told us that the trust had to have fixed assets. 
Now the probate solicitor of my Mum's estate is saying 'WTAF is this?'. 
We can't ignore the trust, even though there were never any declared assets in it. It's complicated by the fact that Mum made substantial gifts to us 'with Dad's money' but basically from her accounts. So there could be capital gains tax to pay on money given to me towards my mortgage which was a sort of 'the money's just resting in my account' deal, where it offset my mortgage whereas in Mum's account it wasn't earning much. 
So even though the joint estate in total would be below the inheritance tax threshold, because we don't have any assets in the trust we might end up paying inheritance tax on quite a chunk of money. 
I think my Mum was badly advised by her solicitor and I think we overestimated her understanding of what was going on. But none of this cut much ice with the probate solicitor. 
Does anyone have experience of a similar story that had a happy ending? 

Certainly sounds chaotic. So many of these dinky little schemes to 'avoid care home fees' would never work anyway. In the words of financial journalist and broadcaster Paul Lewis:

'Some firms make a lot of money selling schemes to “protect” homes. They cannot work because once you have had that thought of taking some action to get more public money, any scheme is scuppered, even if the home is put into a trust. Save your money. And remember if you, your spouse or partner, or a relative over 60 or severely disabled remains in the property, its value is ignored.'

Dividing the estate wouldn't save IHT if the first parent to die left everything to the surviving spouse, who would then have 2 x the nil rate band (2 x £325K)  before tax was payable - and even more now that there is an extra tax free 'layer' where a house is left to the children of the deceased.

Why do you think capital gains tax might be payable on gifts from your mother to you? From what you've said (which I appreciate is a potted summary of a complex situation) it sounds more likely that some or all of these would be added back into your mother's estate if they were given to you less than 7 years ago, and might (or might not) give rise to an IHT bill.

I don't know what happy ending you believe is possible, but I'd start by talking to the solicitor handling probate and asking whether you have grounds for making a complaint about the advice given by previous solicitors.

theoretica

I think you would want to be very clear headed about exactly which advice of the previous solicitors you are complaining about.  The 2002 advice about putting a trust into the will?  Was that good advice for your parents *in 2002*? (My parents were advised to put something similar in their wills around then.)  Or following the will in 2010 and not advising a deed of variation to change it?  What exactly was the solicitor's role in 2010? Did your mum ask for advice or just help carrying out the will?

KaMaHu

They were involved in setting up the Trust - or advising it in 2002 then enacting it in 2011 (by which time it wasn't relevant I think) and they also handled the sale of Mum's house and purchase of new flat around the same time. So basically Mum did everything they told her, and they didn't suggest a variation of the trust (or winding it up? Or simply not enacting it). 

KaMaHu

As to why I think capital gains tax might be due - if we say that the money lent/gifted to me was from the Trust it would be subject to capital gains tax. I think that is the case. 

getmore4less

The tax rules changed in 2006/2007  around trusts and protecting 1/2 the assets along with the introduction transferable nil rate band.
What was advised in 2002 would have been pre these changes and often involves some sort of nil rate band trust to utilise the nil rate bands and avoid the assets becoming part of the survivors estate

Post those  changes  IPDI  trusts were often more appropriate.as the assets and the transferable NRB became the survivors a for IHT with the assets ringfenced from any asset grab like care fees. 

Marcon

The word 'think' keeps appearing in your posts. You do need to find out for sure - you can't set out resolving a problem until you know what the problem is. Nobody here, however willing or knowledgeable, is going to be able to help much because sight of all the paperwork will be crucial to what happens next.

KaMaHu

Marcon, tbh there is very little paperwork. I'm waiting for my sister to send me scans of any documents we do have. 

xylophone

When your parents made  their wills in 2002,  ( which of course predated the 2007 changes) they may have had two considerations in mind.

Firstly,  if they owned their home as joint tenants, they may have wished to ensure that  after the death of one spouse, (leaving the survivor as sole legal and beneficial owner of their home), only half the value of that home could be considered as beneficially owned by the surviving partner.

They would therefore have severed the joint tenancy to create a tenancy in common. This meant that each party became the beneficial owner of only half the value of the home.

Secondly, they may have wished to protect the nil rate band of the deceased spouse  -  they decided to achieve this by creating a nil rate band discretionary trust - that is to say, assets up to the value of the nil rate band would be passed into Trust on the death of the first to die, thus avoiding  the situation where all assets had been left to the surviving spouse so that only one nil rate band could be used when he /she died.

It was usual to name the surviving spouse as one of the Trustees of the Trust with the other Trustees being offspring/relation/solicitor etc as required.

On death, if the survivor chose to go the NRBDT route (rather than changing his/her mind and going for a Variation of some description), the Trust would be set up.

The deceased may have had  cash/ shares etc worth up to the value of the NRB - these assets could have been transferred into the ownership of the Trustees who would have opened appropriate Trust accounts in their names to hold them and operated the relevant  HMRC rules in respect of income/CGT etc.

However, the main asset of the deceased may have been his/her share in the family home - in this case, the Trustees would have  become the creditors of the surviving spouse, accepted a debt of the relevant sum and taken a charge against the property, to be repaid on sale of the property when the deceased died.

By the time the OP"s father died, the 2007 changes had come into effect (so that the OP's mother may  have been better advised to go the Variation route).

However, this did not happen, the Trust was created and so the question now is how exactly was this done and what assets were passed into Trust?

KaMaHu

There is an IOU for 118k from my Mum to the trust - we don't really know what that sum is. It's less than half the value of their house when it was sold. 
The trust was just ....'set up' - the solicitors made a document and it was witnessed. But no actual assets were put into any particular place. You have to understand that at this point it would never have occurred to us that we should look at all Mum's money. That only started to happen as she lost capacity and we took charge of her finances in the years before she died, from about 2014 onwards. But we didn't know that the trust had to have specific assets. 

xylophone

Your father's will stated that "up to the value of the nil rate band then obtaining" should be transferred into the Trust?

It was decided that only a certain portion of that value should pass into Trust?

 The amount in question was £118,000 ?

The Trustees did not demand actual cash but accepted an IOU from  your mother?

The IOU is an asset of the Trust  (its only asset apparently) and is a debt of your mother's estate.

It would appear therefore that only  36% of your father's NRB was used to make the gift into Trust.

If so, then it is possible that there could be a transferable amount of NRB to use against your mother's estate?

It seems to me that as a first step you need to value your mother's estate at date of death and calculate the value of the gifts she made from her accounts between 2010 and date of death.

Was she still the registered proprietor of the flat when she died?