I'm trying to understand how Inheritance Tax is affected by trust wills - can anyone help please?

poseidon1

Emanef said:

Not sure I explained it properly. On the first death it goes into trust with the beneficiary being the surviving partner, and that person being a trustee along with another with the instruction that the surviving partner can live their live as before and the trustees (of which one is that person) should take a hands of approach. On the second death it goes into trust for our daughter, with family members being trustees and instructions on how to finance her until she's 25, etc. 

We're both quite old parents (50s) and our daughter is only 7, so the thinking is if one of us dies and the other remarries, having it in trust protects our some of our daughter's inheritance from any new spouse and their children, and also a certain amount of money if either of us goes into care after the other kicks the bucket. 

We're quite happy with the setup of the trust; that wasn't what I was looking for advice on. I just wanted clarification on the IHT allowance thing when it's going into a trust where the spouse is the beneficiary compared to when it just goes to them normally as I'm trying to get my head around it all before we go back to the solicitor and discuss further with them. 

Emanef some of the responses here  seem to tacitly  disapprove of  the Will Trust  arrangements you have been professionally advised to create, which seems to be clouding the simple answer to your question.

So to answer your question as simplistically as I can, on the death of the surviving spouse the life interest trust for them is transparent and 'look through' for IHT purposes and treated as if they had inherited the assets outright. This is how such life interests trusts have always been treated and is useful in the particular circumstances you have outlined.

Of course if the estate on 2nd death exceeds the combined nil rate bands ( and residence nil rate bands) then the ultimate trust for your daughter will bear an IHT charge but no more than she would have faced had the estate been left to her outright.

As to the ultimate trust for your daughter, you have appointed family members as trustees and who  possibly will also be her legal guardians. It seems the form of trust chosen maybe the special 18-25 arrangement which does have some tax issues of its own, but no doubt that was explained to you and you were happy to accept this on behalf of daughter as the price to pay to safeguard her inheritance ( from herself and others ) until age 25.  Frankly all sounds reasonable to me!

Finally, you are in your 50s now, if you both survive another 15 years you will no doubt re- visit at that time the necessity for an ongoing trust for your daughter, although given your reasoning process you may  still  wish to retain the reciprocal life interest trusts, for the reasons you stated. Again your choice, but by then your child ( if mature and of the right aptitude ) could be the co trustee with surviving spouse. Again, entirely your choice based on your own understanding of your family dynamics.

It's a shame you could not receive a bit more clarity on this from your  solicitor, but my own experience is some professionals are better than others at breaking down these complex matters in layman's language.

Emanef

Thank you so much, that is kind of very useful reply I was hoping for and it exactly the information I was looking for. Yes, it has felt that I got a few backs up for some reason. 

Yes, I imagine we'll revisit it all periodically, especially the guardian issue as we, she and our relatives all get older. 

We have had two video calls with our solicitor (he's not that local and we work from home so are used to Zoom/Teams meetings) and he did go through it all in detail, it was probably us struggling to take in all the information and explanations that have left us unsure on a couple of things. Like I said, we are due to speak to him again soon, but I thought it better to try to get all the correct info together before that, instead of waiting and then having to potentially go back to him another time unnecessarily. 

Many thanks again, I really appreciate you taking the time to explain.

poseidon1

Emanef said:

Thank you so much, that is kind of very useful reply I was hoping for and it exactly the information I was looking for. Yes, it has felt that I got a few backs up for some reason. 

Yes, I imagine we'll revisit it all periodically, especially the guardian issue as we, she and our relatives all get older. 

We have had two video calls with our solicitor (he's not that local and we work from home so are used to Zoom/Teams meetings) and he did go through it all in detail, it was probably us struggling to take in all the information and explanations that have left us unsure on a couple of things. Like I said, we are due to speak to him again soon, but I thought it better to try to get all the correct info together before that, instead of waiting and then having to potentially go back to him another time unnecessarily. 

Many thanks again, I really appreciate you taking the time to explain.

Indeed, wills planning involving trusts and how this interacts with a complex inheritance tax regime can be difficult to grasp.

However where personal circumstances warrant the  use of these protective vehicles ( as I believe yours do), it does not hurt to reach out to gain a little more insight from others even whilst engaged in discussions with the professional you are dealing with.  From my perspective it demonstrates your desire to understand as best you can the full import of what you are undertaking on your daughter's behalf whilst keeping an eye on IHT efficiency.

Frankly,  it would be nice if more people were as  diligent in their estate planning objectives!