Executing a will where there are existing trusts created by the deceased

a1b2c3

My father died earlier this year and I am an executor for his will (along with my mother and siblings). Most of his estate is straightforward and well documented, and his will was very simple, with my mother inheriting everything (so no complications with IHT). After doing some research on the process (including some useful information on this forum) I thought I would attempt to apply for Confirmation (the Scottish equivalent of probate) myself, rather than immediately handing everything over to a solicitor.

However, I have hit a stumbling block because my father had set up four offshore trusts (IOM) and after reading up on the subject I am not clear about whether these fall into the Confirmation process, and whether any IHT liability exists. I realise that I may just have to engage professional advice on this, but I wondered if anyone could offer general advice, so I can arm myself with a rough idea of what should be happening before getting involved with lawyers!

Unfortunately the paperwork I have inherited does not explain the nature of the trusts very clearly. Two of the trusts are investment bonds set up as "Without capital protected death benefit" whole of life assurance policies (naming my parents, myself and my siblings as the Lives assured), one trust is a discretionary will trust set up as joint life, last death life bond (parents as lives assured) and one trust is a Clerical Medical vehicle naming my parents, myself and my siblings as the beneficiaries.
One of the trusts named my parents as the trustees, all the others name my parents and myself as the trustees.
All payments into the trusts were made more than seven years ago. 

Unfortunately, I just signed the papers my Dad asked me to years ago when I became a trustee, and thought no more about it. When my Dad actually showed me the documentation much later, he was unable to explain the purpose of the trusts and how they worked. He was involved with some IFAs for many years that he trusted implicitly (and whom I have concerns about, based on previous dealings) so he had obviously created the trusts on their advice. From reading some of the documents, I believe the IOM trusts were set up with the intention of minimising IHT (and no doubt maximising the IFA's ongoing fees...).

Apologies for the rather long winded post. I am not expecting anyone to solve this particular can of worms for me, but would appreciate any general advice about the questions I need to get answered if I do have to engage professional advice. We are not looking to transfer any money from the trusts or do anything else with them at this time (that's a future problem...). I would just like to establish if there is an immediate requirement to declare them for Confirmation or any possibility of an IHT liability. 

Marcon

a1b2c3 said:

My father died earlier this year and I am an executor for his will (along with my mother and siblings). Most of his estate is straightforward and well documented, and his will was very simple, with my mother inheriting everything (so no complications with IHT). After doing some research on the process (including some useful information on this forum) I thought I would attempt to apply for Confirmation (the Scottish equivalent of probate) myself, rather than immediately handing everything over to a solicitor.

However, I have hit a stumbling block because my father had set up four offshore trusts (IOM) and after reading up on the subject I am not clear about whether these fall into the Confirmation process, and whether any IHT liability exists. I realise that I may just have to engage professional advice on this, but I wondered if anyone could offer general advice, so I can arm myself with a rough idea of what should be happening before getting involved with lawyers!

Unfortunately the paperwork I have inherited does not explain the nature of the trusts very clearly. Two of the trusts are investment bonds set up as "Without capital protected death benefit" whole of life assurance policies (naming my parents, myself and my siblings as the Lives assured), one trust is a discretionary will trust set up as joint life, last death life bond (parents as lives assured) and one trust is a Clerical Medical vehicle naming my parents, myself and my siblings as the beneficiaries.
One of the trusts named my parents as the trustees, all the others name my parents and myself as the trustees.
All payments into the trusts were made more than seven years ago. 

Unfortunately, I just signed the papers my Dad asked me to years ago when I became a trustee, and thought no more about it. When my Dad actually showed me the documentation much later, he was unable to explain the purpose of the trusts and how they worked. He was involved with some IFAs for many years that he trusted implicitly (and whom I have concerns about, based on previous dealings) so he had obviously created the trusts on their advice. From reading some of the documents, I believe the IOM trusts were set up with the intention of minimising IHT (and no doubt maximising the IFA's ongoing fees...).

Apologies for the rather long winded post. I am not expecting anyone to solve this particular can of worms for me, but would appreciate any general advice about the questions I need to get answered if I do have to engage professional advice. We are not looking to transfer any money from the trusts or do anything else with them at this time (that's a future problem...). I would just like to establish if there is an immediate requirement to declare them for Confirmation or any possibility of an IHT liability. 

I don't think it's an 'if' you engage professional advice...you need to, especially if you've been a trustee for years (as appears to be the case) without a clue what was going on - not that uncommon, but not a great idea to let it continue.

There's little point trying to comment when you don't even know what type of trusts these are. A competent solicitor should be able to explain things for you as part of their role, and it would be wise to get on and make an appointment to see one as soon as you can. Gather as much paperwork as possible and have that in apple pie order to help keep down time, and thus costs.

Keep_pedalling

Have to agree you need professional help, even if all of them fall outside his estate you need to confirm that and establish what your responsibilities are as a trustee. 

Make sure any solicitor you use is an expert on trusts.

https://www.step.org/directory/members/search?f%5B0%5D=branch_members%3ASTEP%20Scotland

buddy9

Agreed

This looks like it has legal complexity and you need to specifically engage someone who understands offshore trusts to explain, determine IHT status, and unravel it all.

in_my_wellies

You are in a similar position to me about 18 months ago. I too signed forms without any real understanding and also lost all trust in mum's IFA. 

I engaged a new recommended IFA and the best advice he gave me was to print out the probate forms (he told me which ones, there were dozens!) and complete as much as I could. Then find a specialist solicitor who charged by the hour, not by percentage of the estate or complete task. I annotated everything clearly. 

I sat with her to check everything and she only had to complete two sections and write a covering sentence in legal wording. I would not have been able to do this. So well worth the two hours she charged. 

tls123

You state some of the trusts are with investment providers have the providers written to you to confirm the trustees/beneficiaries  and next steps? Have you the trust documentation when these were set up? generally by nature as trusts continue with remaining trustees and beneficiaries then they don’t fall into the estate but if you are seeking professional advice I imagine the solicitor will need to see the trust deeds for each trust when they were established to be able to confirm for certain if they need to be included in your certificate of confirmation. 

poseidon1

There is absolutely no doubt you will require specialist advice and  this must be from a STEP qualified solicitor obtained from the link provided by Keep_pedalling. It is also possible that a STEP qualified accountant maybe required if the potential IHT complexities discussed below apply.

The nature and dates the  trusts were created are  important to ascertain ASAP to determine whether the trusts themselves have triggered IHT liabilities in their own right, so hopefully you have the full complement of trust documents related to each investment bond.

So some key points to consider when you consult an appropriate lawyer:

*  Scotland has its own trust regime with elements separate and distinct from England's trust law. So despite the trusts having been established using  IOM documentation,  since it was established by a Scottish domiciled settlor and has trustees similarly  resident in Scotland, the trust is based in Scotland ( not offshore).

*  Notwithstanding  the above and the trusts being resident in Scotland, they are nonetheless overlaid with the general UK tax rules appertaining to trusts. As far as IHT compliance is concerned the date the trusts were created is therefore paramount. 

* Any trust created after 22 March 2006, be it discretionary or Interest in Possesion (IPP)  - ie where beneficiaries have an absolute right to trust income , must be reported to HMRC via form IHT 100, and if investment bonds are involved in the mix then supplementary form D34 also required.

Why is this a requirement,? because such trusts were from that date liable to IHT at the date they created if their cumulative values exceeded the prevailing nil rate band at the time. Gifts into such trust in excess of the NRB face a 20% lifetime IHT charge.

 * If all the trusts are pre March 2006, then the reporting requirement above only relates to discretionary trusts.  Gifts into IPP trusts previously benefited from the potentially exempt transfer (PET) regime which merely required the settlor/Truster to survive 7 years for the gift to fall out of account. Hopefully, therefore all the trusts were in fact pre March 2006 entities.

* Returning to discretionary trusts , ( and post March 2006 IPP trusts), there is a further IHT quirk and this is by way of 10 year anniversary decennial IHT charges.

Each 10th anniversary of the creation of such trusts, they are required to again submit a form IHT 100. If the value of trust fund exceeds the NRB at that time, then there is a 6% IHT liability on that excess. Although such trusts ordinarily have their individual NRBs, there are very complex rules for trusts created at the same time whereby they end up collectively sharing a single NRB.

If all this were not enough, where between the 10 year charge periods and a 6% IHT liability may have been previously incurred, a capital distribution is made to a beneficiary, there may also be an IHT exit charge on that  distribution, imposed on the remaining trust funds.

* Now I have banged on a bit about the complexities of discretionary trusts because by virtue of their  complexity it was rare for insurance companies  ( or IFAs for that matter ) to offer this type of settlement to the average retail customer.

In this regard  I note you describe one of the trusts as a Discretionary Will Trust. Now if you have described this correctly, it may not have become a fully functioning trust until either the death of your father  or the 2nd death of your mother. So in determining whether any of the discretionary trust  tax complexities mentioned above  do actually apply  at this moment, one needs to ascertain whether that trust incorporates a clause requiring the cessation of the settlement within 2 years of death ( preferably of the original settlor ). There is a specific exemption for limited term discretionary trusts in that category.


Hopefully having regard to  the above points and as reccomended by everyone  responding to your post, you now feel minded to seek specialist advice forthwith.  Certainly if you wish to ensure your father's estate and associated trusts are fully tax compliance, I don't think you have a choice.

a1b2c3

Thank you for all the replies

My father was thorough with his filing, but I don't have copies of all of the deeds for the Trusts so I need to do more digging with the providers and the IFA to find out where those are. Three of the trusts are pre 2006, but the Discretionary Will Trust is 2016, and it looks like the two trusts with the missing deeds were created at the same time, so I think I am managing to tick several of the complexity boxes!

The trusts were clearly sold to my father by the IFA as a "tax efficiency" move, and he thought the IFA could do no wrong, so he just signed up to what they recommended. However, he clearly didn't understand the complexities and potential liabilities (especially towards the end of his life when he found it harder to deal with financial matters). As I mentioned in my original post, as a result of some specific interactions I have had with this IFA, I don't trust (no pun intended) them at all.

I will investigate professional advice, once I have the missing paperwork. I can see a number of local trust specialists listed on the STEP website, but without a personal recommendation, it is difficult to make a choice. I'm aware from the administration of another relative's estate that the wrong solicitor can result in years of headaches.

Once again, thanks for taking the trouble to reply to my post. It's very useful to have this background information, rather than trying to engage a solicitor cold.

poseidon1

a1b2c3 said:

Thank you for all the replies

My father was thorough with his filing, but I don't have copies of all of the deeds for the Trusts so I need to do more digging with the providers and the IFA to find out where those are. Three of the trusts are pre 2006, but the Discretionary Will Trust is 2016, and it looks like the two trusts with the missing deeds were created at the same time, so I think I am managing to tick several of the complexity boxes!

The trusts were clearly sold to my father by the IFA as a "tax efficiency" move, and he thought the IFA could do no wrong, so he just signed up to what they recommended. However, he clearly didn't understand the complexities and potential liabilities (especially towards the end of his life when he found it harder to deal with financial matters). As I mentioned in my original post, as a result of some specific interactions I have had with this IFA, I don't trust (no pun intended) them at all.

I will investigate professional advice, once I have the missing paperwork. I can see a number of local trust specialists listed on the STEP website, but without a personal recommendation, it is difficult to make a choice. I'm aware from the administration of another relative's estate that the wrong solicitor can result in years of headaches.

Once again, thanks for taking the trouble to reply to my post. It's very useful to have this background information, rather than trying to engage a solicitor cold.

Useful additional information.

It is possible you can be more relaxed about the 3 pre 2006 trusts, especially if they turn out to be IPP settlements which were somewhat benign in their various tax implications at the time.

 However, even with those you have to be very careful how you now terminate them in favour of family members if you are to avoid excessive income tax on the investment bond gains accrued by the trusts over the years. Depending on whether the bonds are UK based ( taxed in the UK ) , or offshore (untaxed), the trusts could face income tax liabilities on realised bond gains of anything between 25% to 45%.

 By contrast, there is potential to mitigate this tax exposure by transferring bonds to beneficiary personal ownership, and the beneficiaries utilising their personal tax status ( using something called top slicing relief ) to mitigate bond gain taxation individually. Top slicing relief is not  available to trusts.

With regard to the 2016 Discretionary Will Trust, there is more urgency to ascertain its true nature , that is to say:

1) Was any gift into it reportable to HMRC by way of form IHT 100 at the time?

2) Did that gift  if it actually occurred at the time ( rather than deferred until death) , exceed the prevailing NRB, and thereby trigger a 20% IHT liability in 2016? Alternatively, if it was deferred until death did it consume some or all of your father's NRB on death and trigger IHT at date of death , contrary to your assumption at the time ( ie your mother not inheriting the bond that ended up in that trust).

3) if the effective date of creation was 2016 rather than your father's date of death, 2026 will be the 1st 10 year IHT anniversary so the tax implications of it remaining in exsistence at that date need to be considered. Alternatively, if effective date of creation is your father's death, you have only 2 years post death to get rid of it to avoid entering the full blown Discretionary trust regime. One way or another the clock is ticking on that trust.

The intricacies of investment bond taxation and  general trust tax compliance, tends to be more the skill set of STEP accountants rather than lawyers.

Certainly, when it comes to preparing personal and trust tax returns for the bond encashments , you are looking at a tax accountant to guide you through this. If the family do not already have a decent tax accountant on tap, I believe you will need one in addition to a lawyer on the legal aspects.

If you feel up to it, you could benefit from having a read of the  link below produced by the investment company abrdn. It was produced with qualified  financial advisers in mind, but I find it to be one of better expositions on the income tax aspects of bonds held in trust.

Best of luck moving forward!

poseidon1

poseidon1 said:

a1b2c3 said:

Thank you for all the replies

My father was thorough with his filing, but I don't have copies of all of the deeds for the Trusts so I need to do more digging with the providers and the IFA to find out where those are. Three of the trusts are pre 2006, but the Discretionary Will Trust is 2016, and it looks like the two trusts with the missing deeds were created at the same time, so I think I am managing to tick several of the complexity boxes!

The trusts were clearly sold to my father by the IFA as a "tax efficiency" move, and he thought the IFA could do no wrong, so he just signed up to what they recommended. However, he clearly didn't understand the complexities and potential liabilities (especially towards the end of his life when he found it harder to deal with financial matters). As I mentioned in my original post, as a result of some specific interactions I have had with this IFA, I don't trust (no pun intended) them at all.

I will investigate professional advice, once I have the missing paperwork. I can see a number of local trust specialists listed on the STEP website, but without a personal recommendation, it is difficult to make a choice. I'm aware from the administration of another relative's estate that the wrong solicitor can result in years of headaches.

Once again, thanks for taking the trouble to reply to my post. It's very useful to have this background information, rather than trying to engage a solicitor cold.

Useful additional information.

It is possible you can be more relaxed about the 3 pre 2006 trusts, especially if they turn out to be IPP settlements which were somewhat benign in their various tax implications at the time.

 However, even with those you have to be very careful how you now terminate them in favour of family members if you are to avoid excessive income tax on the investment bond gains accrued by the trusts over the years. Depending on whether the bonds are UK based ( taxed in the UK ) , or offshore (untaxed), the trusts could face income tax liabilities on realised bond gains of anything between 25% to 45%.

 By contrast, there is potential to mitigate this tax exposure by transferring bonds to beneficiary personal ownership, and the beneficiaries utilising their personal tax status ( using something called top slicing relief ) to mitigate bond gain taxation individually. Top slicing relief is not  available to trusts.

With regard to the 2016 Discretionary Will Trust, there is more urgency to ascertain its true nature , that is to say:

1) Was any gift into it reportable to HMRC by way of form IHT 100 at the time?

2) Did that gift  if it actually occurred at the time ( rather than deferred until death) , exceed the prevailing NRB, and thereby trigger a 20% IHT liability in 2016? Alternatively, if it was deferred until death did it consume some or all of your father's NRB on death and trigger IHT at date of death , contrary to your assumption at the time ( ie your mother not inheriting the bond that ended up in that trust).

3) if the effective date of creation was 2016 rather than your father's date of death, 2026 will be the 1st 10 year IHT anniversary so the tax implications of it remaining in exsistence at that date need to be considered. Alternatively, if effective date of creation is your father's death, you have only 2 years post death to get rid of it to avoid entering the full blown Discretionary trust regime. One way or another the clock is ticking on that trust.

The intricacies of investment bond taxation and  general trust tax compliance, tends to be more the skill set of STEP accountants rather than lawyers.

Certainly, when it comes to preparing personal and trust tax returns for the bond encashments , you are looking at a tax accountant to guide you through this. If the family do not already have a decent tax accountant on tap, I believe you will need one in addition to a lawyer on the legal aspects.

If you feel up to it, you could benefit from having a read of the  link below produced by the investment company abrdn. It was produced with qualified  financial advisers in mind, but I find it to be one of better expositions on the income tax aspects of bonds held in trust.

Best of luck moving forward!

https://techzone.abrdn.com/public/iht-est-plan/Taxation-of-Bonds-in-Trust#:~:text=If the settlor is dead and the bond is being,pay on the gains made

The link I referred to!

a1b2c3

Thanks again