Baffled - do I need to complete IHT400 for first spouses death?

RipleyG

Firstly apologies - I'm sure this has been asked before, but I've searched and can't obviously find it. I'm struggling to work out if I need to complete form IHT400 (plus any relevant schedules).

My Dad died last month, and I'm Executor. He left personal chattels to mum - value £24k. His 50% share of the marital home (£375k 50% share as tenants in common) and all financial assets (£638k) move into a will established trust. Initially this is a life interest trust with Mum as the main beneficiary entitled to all income (on her death a discretionary trust is established to hold the capital).

Total value of Dad's estate comes to £1,037,000, of which £1,013 is in the newly established trust.

The gov.uk page says an estate is excepted if "the person who died left everything to a spouse or civil partner living in the UK or to a qualifying charity, and the estate is worth less than £3 million". In this case, I understand I would not need to complete IHT400.

But it also says "If the estate includes trusts you'll need to send full details of the estate if the person who died: gave gifts (such as cash, property, and shares) that were put into trust. You’ll also need to send full details if assets held in trust passed to a surviving spouse, civil partner or charity, and the trust was worth £1 million or more". In this case, I understand I WOULD need to complete IHT400.

What I'm unclear about is whether the reference to trusts is only meant to refer to trusts that existed before my Dad died, or whether it is meant to include the trust established by his will.

Help!

poseidon1

The reference is to any trust your father had an interest in that continued after his death. The life interest trust newly established under his will is not caught and represents an exempt gift under the spouse exemption, so no IHT 400 required.

However, I am concerned about the discretionary trust which automatically takes effect after your mother's death. Is there a specific reason for the life interest trust continuing in this form?

You do realise that retaining the on going discretionary trust provision in the will after your mother's death will disallow the application of your father's £175k transferable residence nil rate band, resulting in £70k of avoidable IHT.

If this was a solicitor drafted will, suggest you query the purpose of the continuing discretionary trust given the unnecessary IHT charge on your mother's death it might occassion. As of now, on your mother's death there will only be £ 825k of nil rate bands available rather than the usual £1 million.

In passing, is there a reason why all the financial assets ( £638k) have passed into the life interest trust rather than vested in your mother's ownership absolutely ? It does mean investing to produce taxable trust income on your mother's behalf with all the attendant trust accounting and tax compliance costs. It also excludes ISAs on her behalf. Does your mother suffer from some form of disability to justify the financial assets being held in trust?

morgmonster

Have you been through the online checker to make sure you don't have to do the form? Don't just rely on the main outline of the rules, they can't list every scenario that makes the IHT400 necessary. When my dad died with similar asset value to yours and everything left to spouse we thought it was unnecessary, but when I went through the checker let us know that we did need to do it (foreign assets - just shares held on a French exchange - only a few thousand over the limit - due to a surge in price the week before his death!!). Having said that, doing the IHT400 was not as awful as I thought and it seemed to help us fly through probate in just a couple of days.

RipleyG

Thank you @poseidon1 for such a quick reply. Ok, so no IHT400. Great. In terms of your other question - will do my best to answer in order…

Reason for the life trust continuing? I don't honestly know, so could only speculate, which might not be helpful. It was a solicitor drafted will, written in 2017. (Edited to add: I have now spoken to mum who can simply remember that a) they were told it could protect all assets of the 1st spouse to die from care home fee assessment of the second spouse and b) it was 'tax efficient'.)

No, I hadn't appreciated that the conversion to a discretionary trust would mean Dad's RNRB could not be transferred to mum. So thank you, that's an extremely useful flag.

In terms of the financial assets, I'm again not aware of any specific reason, and can only say that it was discussed with the solicitors and advice taken at the time. Mum is of very sound mind, and body so no vulnerability reason to take into account.

Frustratingly we had a short 'explain the will to us' meeting with the same solicitor firm that drafted the wills (different solicitor), and specifically asked if they could explain the pro's and con's of the trusts. The loss of the transferable NRB was not something they mentioned so is perhaps something for me to revisit with them (though it does frustrate me that they will presumably view that as a chargeable exercise). They did say it's possible to terminate the life interest trust within the first 2 years - but that if we terminate it, normal IHT rules would apply at the point we distribute the assets. Do you know whether doing so would prevent the discretionary trust ever being established and therefore put the TRNB back in place?

RipleyG

https://forums.moneysavingexpert.com/discussion/comment/82043718#Comment_82043718

Thank you. Yes, I did the online checked, but that simply told me no IHT was payable and was silent on whether or not I needed to complete the form. That's why I checked the relevant pages and yhen wanted to check my understanding of what was written there.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82043745#Comment_82043745

By coincidence, a life interest trust which converted to discretionary on death of the surviving spouse arose in another post below -

https://forums.moneysavingexpert.com/discussion/6672786/applying-for-probate

I was highly critical at what had been set up by the will writing firm in that case, and similarly critical of what the law firm has done with regard to your father's Will trust.

In my view your father's lawyers cynically created something that would require their on going professional input (so more fees), but no measurable benefit to your mother, and to the detriment of her estate on death for IHT purposes.

You will see in the thread above that a solicitor was engaged by that family who put forward a written advice letter outlining a sensible course of action to remove all financial assets from trust and revise the terms of the property in trust to terminate on death. This would require preparation of appropriate deeds of appointment and advancement.

In your case, I would definitely not go back to original firm to effect the changes to your father's will trust to rectify the tax and trust administration problems created. This would be akin to rewarding them for creating the problems in the first place. Suggest you seek out a STEP qualified lawyer to undo the damage caused by the other firm. STEP is the Society of Trust and Estate Practitioners, and hopefully you have a choice of qualified specialists in your area.

Whilst dealing with the amendments to your father's will trust, if your mother does not yet have Health and Financial LPAs set up on her behalf, then that should be a priority in case she becomes incapable of self management of her financial assets in future.

RipleyG

The attached post was interesting reading. Wills & estate planning were on my list of things to do with mum once we'd completed probate - clearly both need to be a priority.

Mum does have existing LPAs set up and registered, done at the same time and by the same solicitor as drafted the wills. I have checked the STEP website, and that original solicitor is showing as a Full TEP member - though no longer working with the same firm. I'm not sure whether that gives me hope there was good reason for the wills being written as they were, or not!

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82043864#Comment_82043864

The only justification for placing the financial assets in trust rather than your mother control them, is if there was a perception she either would not be capable of managing them herself or had no desire to do so.

From my professional experience in the distant past, this was often the justification for these types of trusts for widows and in all fairness there was a generation of much older women from very comfortable wealthy backgrounds more than happy to relinquish control of their affairs to others in this way.

However you have given no indication that your mother fits that profile. Therefore other than perhaps a measure of chauvinistic thinking by the lawyer concerned, there really can be no justification for all your father's assets to be tied up in trust in this way.

The house in trust is fine, and becoming a very popular form of estate planning across all social strata (albeit a trust typically terminating at death). However, the discretionary trust rider in this case is wholly unnecessary and gives rise to loss of part of your father's NRBs and potential IHT as a result. Can't see any lawyer being able to justify that.