February 2010
Last month’s article showed, following the availability of transferable (IHT) nil rate band applying to spouses (or civil partners); that executors or trustees would usually dispense with any discretionary provisions –which pre 9 October 2007 might have applied to “mop up” the nil rate band applying of the first spouse (or civil partner) to die.
However, there are circumstances where it may be appropriate to incorporate nil rate band discretionary trusts, within Wills, to provide absolute flexibility of approach.
Where nil rate band discretionary trusts are still appropriate
• Should the surviving spouse have remarried then he/she will have an additional nil rate band available from the death of the first spouse.
A potential scenario is where there are children of the marriage, but the surviving spouse is younger (than the spouse who has died); therefore it is possible he/she could re-marry.
In these circumstances a nil rate band trust would protect the inheritance of the children: as the executors of the surviving spouse could well have more than one transferable nil rate band (from more than one spouse); so part of the (IHT) relief could be lost.
A nil rate discretionary trust could give the children as much of the nil rate band, as remains available, on the event of the first spouse to die.
• Where assets in the estate will qualify for agricultural property relief (APR) or business property relief (BPR). The nil rate band discretionary trust can be a vehicle to hold such assets and this estate planning can effectively “re-cycle” the APR or BPR.
Thus, shares in a family business (worth more than the IHT nil rate band), but should qualify for 100% BPR; can be allocated to the nil rate band trust. The widow can receive the assets that do not qualify for any IHT relief (but will be exempt anyway under spouse exemption); which could include say cash from insurance policies or nominated death in service benefit.
With the cash the widow can purchase the (family business ) shareholding from the trustees; that, effectively, would give the trustees far more, in real terms, than the (IHT) nil rate band so that the children would receive a greater inheritance.
If the widow lives for two years, following her purchase of the (family business) shareholding, then BPR will again be available.
Meanwhile the trustees are able to exercise a measure of control over the children’s inheritance.
Result- everyone is very content –the only losing party is HMRC!
• Where future care costs are a concern to the spouses. A discretionary trust can shelter from care fees the estate of the first spouse to die (who is often looked after by the spouse who survives but thereafter he/she may also require care provision).
Against this, has to be judged the costs of running such a discretionary trust, and potential adverse income tax rates should the annual trust income exceed the “standard” income tax rate band applying.
• For asset protection purposes – (to guard against future financial or marriage failure); a discretionary trust would protect estates from the subsequent profligacy of a second spouse or partner appearing on the scene!
In all the above “scenarios” –appropriate planning, in conjunction with your professional adviser, is recommended before any action is contemplated.
Andrew Murdoch
(ACIB, AIFP, Dip PFS, TEP, Solicitor)
