Prior to 2007, many Wills contained Nil Rate Band Discretionary Trusts to ensure that both spouses could fully utilise their Nil Rate Band and not lose it. In 2007, the law changed so that any unused Nil Rate Band from the first death could then be claimed against the surviving spouse’s estate.
For example, if A and B are married or in a civil partnership and A dies first leaving all their estate to B, A’s estate would be exempt from IHT because of spouse exemption. When B dies in the future, their estate has its own Nil Rate Band and A’s unused Nil Rate Band available to offset against any IHT which may be due.
The change in the law meant that for some couples it was in their interest to simplify their Wills to remove the Nil Rate Band Discretionary Trusts and simply leave everything to each other on the first death.
If, when an individual dies, they still have a Nil Rate Band Discretionary Trust in their Will, then if appropriate, the trust can be ended and, if done within 2 years of the date of death, HMRC will treat the IHT position as if the trust had never been there. In practice, it is common to do this and divert the monies that would have gone into the trust to the surviving spouse. The survivor’s estate can then make use of both Nil Rate Bands in the future.
It is very important that these trusts are not simply ignored on first death and are dealt with properly, taking into account the family’s circumstances, to avoid unnecessary complications for the executors when dealing with the estate of the surviving spouse.
Whilst many clients will want to consider removing the Nil Rate Band Discretionary Trusts from their Wills, there are some circumstances where it might be advisable to retain them.
Assets are Likely to Increase in Value
If your estate has assets that are likely to increase in value, then if these assets are put into a Nil Rate Band Discretionary Trust, any increases in value will be kept outside of the estate of the beneficiary. Further, for assets that qualify for 100% business or agricultural relief, it might be advantageous for these assets to be place into a discretionary trust.
Vulnerable Beneficiaries
If there are beneficiaries of an estate who are vulnerable, or who may not be able to manage large sums of money on their own, then preservation of a Nil Rate Band Discretionary Trust is worth considering. The trustees of the trust will have control of the fund and can manage it on behalf of the vulnerable beneficiary. Further, because the money would be held in the trust, then this would not impact on the beneficiary’s ability to claim means tested benefits if required.
Modern Family Dynamics
Family dynamics have changed considerably over time; blended families are now far more commonplace and the desire for equality between children from previous relationships is key to a lot of people. To make sure that the wishes of both spouses and their children are taken into account and a balance is achieved, some people contemplate using discretionary trusts. By using this type of trust, the trustees can consider several factors to ensure that family assets are divided in an equitable manner.
Care Home Fees
Where an individual is concerned about possible care home fee liability in the future then again, a Nil Rate Band Discretionary Trust is worth consideration. As the Nil Rate Band passes to the trust and not to the survivor then it may be ring fenced and protected from use on care home fees. The survivor can be named as a potential beneficiary so that they can receive funds if needed. Otherwise, the money can be protected for other beneficiaries. The issue of care home fee planning does have a number of intricacies, so it is vital to ensure that you consult a legal advisor about this.
Preservation of the Residence Nil Rate Band
The Residence Nil Rate Band can be reduced or lost completely if an estate is very large. The use of a Nil Rate Band Discretionary Trust can, in some cases, help to keep the surviving spouse’s estate below the threshold and so help preserve the availability of the Residence Nil Rate Band.
The Nil Rate Band Discretionary Trust is certainly not extinct and there are circumstances where they are still worth consideration. Will drafting is always something that requires careful thought. Please contact our private client team on 01934 410910 if you wish to discuss this further.
Sara Anthony
David Satchell