Discretionary Will Trust Disaster

SevenOfNine

Years ago we had a NRB Discretionary Trust in our Wills, & our home owned as Tenants in Common.

On the death of the first of us, what would drop into the trust would be an IOU up to the value of the NRB (in the early years of ours it was pretty much the value of the deceased's share of the house)

Our intention was that the survivor would most likely downsize, so sell the house then either wrap up the Discretionary Trust & pay the Trust beneficiaries (our 2 sons) the value of the IOU (whatever the £££ NRB would be the time, for you it seems to have been a figure of £118k), OR keep the Discretionary Trust IOU in place, as a debt still owed to the Trust beneficiaries & would eventually be paid off when the surviving parent died out of THEIR estate. Effectively a debt owed against the survivors estate. 

Sounds like what your mum did, downsized but kept the IOU in place. Funds that would probably be released on downsizing to a flat from a house kept for her to live on herself, whether she needed it or not. (The IOU is safe it's just primarily tied up as some/most/all the value of her flat now).

Xylophone has made a great job of explaining this. What I'm wondering is when you say mum gave you both "substantial amounts", I'm wondering if she was, not necessarily correctly, chipping lumps off the IOU 'debt', hence she saw it as giving you "dad's money". Reducing the IOU from £118k by whatever she 'paid' you & sister since dad's death.

Maybe Xylophone can say which might be the most beneficial (& legal tax/inheritance/ gifting) way of handling this now.

On the surface, it doesn't sound as if the original solicitors gave bad advice, at the time, back then. It just went out of date!

xylophone

What I'm wondering is when you say mum gave you both "substantial amounts", I'm wondering if she was, not necessarily correctly, chipping lumps off the IOU 'debt', hence she saw it as giving you "dad's money". 

I don't see how mother's intentions can be second guessed.

It seems that Father died in 2010 when the NRB was £325,000 but his total estate ( which must have his share of the family home) was only £319,000. The family home was sold and Mother bought a flat.

The only evidence that any money was actually allocated to the Trust is the IOU accepted by the Trustees for the sum of £118,000 - this seems to be the Trust's only asset and it is a debt of Mother's estate and should be set against any IHT liability her estate may have.

Mother presumably kept the rest of the money for her own use  so that it was never placed into the Trust.

It seems that she chose to make gifts to her offspring from this money - these must therefore be regarded as gifts from her resources?

Therefore as in my previous post, as a first step  the OP needs to value  his 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?

Fly_Guy

I can’t help you with your case, except to say that I am currently in the process of trying to sort out exactly the same kind of mess. Dad died in 2014 with a nill rate trust clause in his will in that wasn’t enacted. Mum died in January. 

The take home from our case is that dads NRB has gone as it was ‘used’ to set up the non existent trust. As such we are now have mums NRB and both their RNRBs, which together are less than the value of the estate. As a result it looks as if we have to pay IHT on the estate that could have been avoided if we had Dads NRB or if the trust actually held his assets. And probate lawyers fees that wouldn’t have been needed if no trust had been originally specified.

All a bit unfortunate as Dad was just trying to do the right thing, while Mum (and the rest of us) were out of our depth and didn’t appreciate the consequences.

C'est la vie! C'est la mort!

KaMaHu

Xylophone - the straw I'm clutching at (and it might be hopelessly unrealistic) is that my Dad's nil rate allowance still exists outside the trust. So as the trust has no demonstrable assets the money still falls into the nil rate band? Or does setting up a trust negate the nil rate band? This is what I hope the accountant will sort out for us. 

Fly_Guy

KaMaHu. We went through a number of similar scenarios with our probate solicitor trying to come up with an argument we could present to HMRC that would allow us to use Dads NRB.

 In the end it became clear that these arguments were all unlikely to succeed and a decision would ultimately be at the whim of an HMRC administrator somewhere - probably after many months of deliberation and letters back and forth. The legal costs, time and stress associated with trying to make these arguments was such that my sister and I decided to just take the hit and move forward without Dads NRB. 

We are both the executors and the sole beneficiaries so that made this decision easier as there were no other beneficiaries to consult / agree.

KaMaHu

Fly_Guy I'm so sorry. It does seem monumentally unfair I'm still in the disbelief stage of this. I can't believe that there isn't a way of saying 'look guys, the total value of the estate is all in the NRB so let's just have a crap discretionary wills trust amnesty'. I think it would take campaigning though and all the bozos like us clubbing together and I suppose we all just feel a bit foolish....

KaMaHu

Xylophone, yes Mum was the sole registered owner of the flat when she died. With regard to the gifts - she thought of these gifts as Dad's money, that she didn't need and so she was helping us out with it. 

Fly_Guy

Yes, it was all rather stressful and unnecessary. But we are only just over the IHT limit without dads NRB so only a few thousand to pay out of what is going to be a substantial inheritance. And in a way, mum had a good state pension for many years and the NHS spent a fortune on looking after her at the end. So to give a little back doesn’t seem so terrible.

Mind, we probably wouldn’t say that it we were paying £100s of thousands....

Marcon

KaMaHu said:

Fly_Guy I'm so sorry. It does seem monumentally unfair I'm still in the disbelief stage of this. I can't believe that there isn't a way of saying 'look guys, the total value of the estate is all in the NRB so let's just have a crap discretionary wills trust amnesty'. I think it would take campaigning though and all the bozos like us clubbing together and I suppose we all just feel a bit foolish....

Your parents took actions purely designed to help ensure that it would be the public purse that paid for their care in old age, despite the fact they had assets (the house) which could if necessary have been used to fund that care. Many people would see that as  'monumentally unfair'... 

I don't know what the value of the estate is, but if you have to pay some tax, so be it. The fact tax is payable at all means the estate is of considerable substance.

xylophone

The take home from our case is that dads NRB has gone as it was ‘used’ to set up the non existent trust.

Are you sure that this is the case?  If the Trust was never set up, what happened to Dad's estate?

Did it go to Mum in its entirety?

If I were you, I would check your situation with HMRC/a solicitor with expertise in wills and trusts.