Does a 'will trust' / 'interest in possession trust' form part of the beneficiary's estate?

5pendthrift

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently, her estate value is approx £275k, consisting of cash and shares. With regard to the trust, my step mothers will states only the following:

 1) My father has the right to interest from the trust for life.

 2) My father can ask to draw down assets from the trust at any time and the trustees must oblige.

 3) On my fathers death the trust assets pass to my step mothers three children and four grandchildren, to be shared equally.

If he accepts this trust as a gift, does it's value (£275k) become part of his estate for IHT purposes?

As an aside, is this technically an 'interest in possession' trust, given that the beneficiary can demand draw down of assets from it at any time?

Keep_pedalling

Yes it will form part of his estate. This sounds very unusual as it does not protect her childrens inheritance. Does your father need this trust or is he financially secure with his own assets?

5pendthrift

Keep_pedalling said:

Yes it will form part of his estate. This sounds very unusual as it does not protect her childrens inheritance. Does your father need this trust or is he financially secure with his own assets?

Well over 10 years ago my father and step mother drew up 'mirror wills'. Passing on assets to their own children and grandchildren was mentioned in passing, nobody in the immediate family took much notice at the time. My step sisters are named as joint executors and trustees, they've taken some rudimentary legal advice, leading them to contact me, voicing their concerns, because as you say the wording doesn't appear to protect their and their children's inheritance. I've read my fathers will, the wording is the same in that the surviving spouse can demand assets from the fund at any time without regard to second tier beneficiaries. 

My sister and I have suggested my father decline the trust in order to pass on my step mothers estate to her direct descendants. He is financially secure, in fact the house he has owned for the last 55 years is now worth so much that the majority of the trust value would be subject to IHT (assuming it falls within his estate). However, my father believes a) the trust won't be part of his estate and b) if that's what his wife wished for in her will then that's what should be done. He's refusing to allow me to take him to a solicitor for some basic legal advice.

I (delicately) talked through a scenario with him whereby if he insisted on trust set up and then passed away a few weeks later, having had no real financial benefit from it, there could be a near six figure IHT demand against his estate from hmrc.

Marcon

5pendthrift said:

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently,

...and it sounds as if your father doesn't appreciate the focus on inheritance at a time when he is still grieving for the loss of his life partner, and doubtless very alert to his own mortality.

However, my father believes a) the trust won't be part of his estate and b) if that's what his wife wished for in her will then that's what should be done. He's refusing to allow me to take him to a solicitor for some basic legal advice.

I (delicately) talked through a scenario with him whereby if he insisted on trust set up and then passed away a few weeks later, having had no real financial benefit from it, there could be a near six figure IHT demand against his estate from hmrc.

He's couldn't have made his current thinking much clearer. You are probably going to have to simply wait (albeit with fingers crossed) for a better opportunity to raise the matter again - or risk real and possibly permanent damage to your relationship with him.

Keep_pedalling

Although the trust does form part of his estate, it is also covered by spousal exemption and does not use any of your step mother’s NRB. If he does a deed of variation in favour of her children then much of the transferable NRB will be lost so his IHT liability will not change very much, unless he was also also widowed from your mother and can claim the transferable NRB from her estate.

Who are the executors?

poseidon1

5pendthrift said:

My father is named as sole beneficiary of what appears to be an interest in possession trust. My step mother died recently, her estate value is approx £275k, consisting of cash and shares. With regard to the trust, my step mothers will states only the following:

 1) My father has the right to interest from the trust for life.

 2) My father can ask to draw down assets from the trust at any time and the trustees must oblige.

 3) On my fathers death the trust assets pass to my step mothers three children and four grandchildren, to be shared equally.

If he accepts this trust as a gift, does it's value (£275k) become part of his estate for IHT purposes?

As an aside, is this technically an 'interest in possession' trust, given that the beneficiary can demand draw down of assets from it at any time?

If you are quoting the wording verbatim it does not sound like a solicitor drafted interest in possession trust, but on the plain meaning of the words employed:

1) It is an enforceable interest in possession arrangement, so however much of it  is left on his death, that would be amalgamated with his personal estate in ascertaining the total IHT charge. For example if had drawn down £100k before death, remaining £175k would be amalgamated with the estate. 

2)  Trust fund would benefit from a proportion of his NRB on death, but then bear IHT at 40% on the difference, so not an happy outcome.

3) Father having the right to draw down capital on demand indicates as life tenant he benefits from an unfettered power to receive trust capital from the trustees, even if this means potentially exhausting the trust in its entirety. Again not brilliant for the remaindermen, but consistence with the testator's desire that the  financial well being of the life tenant be considered paramount above all else. This is not a clause one includes by accident, particularly if his own mirrored will stated the same thing if your step mother had survived him.

From what you have stated, your father would be entitled to do nothing at all and let the chips fall as they may on his eventual death, even if it means an overall increase to his estate IHT bill.
 
If he will not be budged on the matter best you can do for your step siblings is to  ultimately vary your father's estate after death to pass whatever you believe  would be fair in their favour.