Discretionary Trust

What Is A Discretionary Trust?

Sometimes organising a probate trust can be the perfect way to keep your estate simple, to avoid any protracted probate delays, and even to enable everyone to stop worrying about inheritance tax implications. A trust is a great way to give grieving families a bit of time and space to get things organised without too many – if any – complications getting in the way. It is often much more manageable this way.

There are a number of different types of trust. One of these is known as the discretionary probate trust.

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A discretionary probate trust is perhaps not as simple as other trusts, but it does still allow for an easier transition that some other options. It offers a degree of flexibility after the policyholder passes away because it is the trustees who are given the discretion (hence the name) to choose who to pay from a beneficiary list. No inheritance tax will be due on this kind of inheritance because it is classed as a chargeable lifetime transfer.

However, be careful. There are some actions which can still lead to a large tax bill. For example, any gifts made within seven years of your death will be taken into account. There are many other potential pitfalls as well, and so it is always a good idea to speak to a professional about how you can bypass as many issues as possible. 

What is the “Residential Nil Rate Band” and will it affect me?

What is the "Residential Nil Rate Band" and will it affect me?

Have you heard about the impending Residential Nil Rate Band?  Last year, the government announced that starting from April 2017, some homeowners with estates valued at less than £2 million will benefit not only from the current Nil Rate Band of £325,000 per person, but an additional Residence Nil Rate Band of £100,000 per person, (rising to £175,000 by April 2020), on their death.  For a married couple or those in a civil partnership, this means that up to £1 million of their estate can be passed on, without attracting any inheritance tax fees.

There are conditions, however.  For the Residence Nil Rate Band to take effect, the  property in question must be passed on to either a child or a grandchild of the deceased.  In addition, the property must also have actually been the deceased's main residence at some point, even if they subsequently moved to a smaller house or into a care home.

As with the existing Nil Rate Band, the Residence Nil Rate Band can be passed to the surviving partner if not used on the death of the first, making a possible maximum total of £1 million.

Where estates are valued over £2 million, the Residence Nil Rate Band will decrease by £1 for every £2 over this value.

Although this is great news for most of us, those who have set up a discretionary trust in the past should be careful.  A discretionary trust was initially a useful way of passing on a person's Nil Rate Band to their children or grandchildren, before the law changed in 2007.  For those with estates valued under £2 million, this clause could interfere with the application of the new Residence Nil Rate Band.  However, for those with estates valued over this amount, a discretionary trust may remain the sensible financial option.

Why put assets into trust?

Why put assets into trust?

Many of our clients ask why it would be beneficial for them to place assets in the form of money or property into a trust for their children or other loved ones.

In most cases that we handle, assets are put into trust to benefit children who have not yet reached an age dictated by our client.  The trust is set up and managed by one or more trustees, who then have the legal obligation of handling the funds in the trust until such time as they are able to be made available to the beneficiaries. 

There are several different types of trust to cater for specific circumstances and financial objectives:

Discretionary trust - a discretionary trust gives trustees absolute control over how the funds should be managed.

Interest in possession trust – an interest in possession trust can give the beneficiary an immediate income from the invested assets, although they will not have immediate access to those actual assets and may be required to pay income tax as usual.

Bare trust – the simplest trust to set up, a bare trust states that the beneficiary will receive specific assets when they reach a certain age.

Trust for a vulnerable person – of course, trusts are not only set up for children.  Vulnerable adults may also benefit and this type of trust is perfect for them, particularly as the rate of income tax may be reduced.

Non-resident trust – on occasion, we meet with the added complication that all named trustees live outside the UK.  In this instance, a non-resident trust may mean that income tax can be reduced or eliminated altogether.

In addition to providing additional funds for your loved ones, setting up a trust means that the amount you invest in the trust will subsequently be removed from the value of your overall estate, which often helps to reduce the amount of Inheritance Tax which may fall due in the event of your death.

The benefits of putting property into a trust

The benefits of putting property into a trust

There are many benefits associated with putting property into a trust whilst you're still alive – particularly if you have dependants.

One of the main problems of the probate process of course, is the length of time it takes to secure, which usually increases depending on the complexity of the estate.  On average, it can take several months to obtain a grant of probate, during which time all of your assets are frozen and cannot be used by the executors to pay off debts or funeral expenses.  By placing your property into trust now, this then avoids the need to obtain a grant of probate for it, at a later date.

There are two main types of trusts associated with property – a fixed interest trust means that you are the only beneficiary of the asset during your lifetime and that it is automatically passed to your next of kin in the event of your death.  A discretionary trust on the other hand, means that the trustees have complete control over how to distribute the trust's capital.  Remember that in effect however, you are essentially then handing over the ownership of the property to them, whilst you're still alive.  Bear in mind too, that you may incur tax charges during the lifetime of the trust – typically every ten years.

Beware of pension scheme nominations


Pension scheme nominations aren’t always as clear cut as they may seem.  The press recently reported on an IFA who was shocked to learn that on the death of her husband, she was not permitted to receive funding from his pension scheme until after probate had taken place – despite having been nominated as beneficiary.

Friends Life informed Ms Brookes that as no discretionary trust was in place, they were unable to tell her when she would receive any funds.  In the meantime, she was forced to find the money herself, to pay for funeral costs.

It seems that although a beneficiary nomination form was in place, Friends Life only considered this to be an expression of wish, placing the decision of who the money was to go to, in the hands of the administrator of the pension scheme.

This doesn’t necessarily mean however, that a beneficiary nomination isn’t worth the paper it’s written on.  The administrator must take this indication of wish into account, along with the actual will, when distributing the deceased’s final estate.


Closing A Discretionary Trust

If you were advised to take out a discretionary trust as part of your will to minimise your inheritance tax liability as part of your estate planning then you should be aware that since the introduction of the transferrable nil rate band in 2007, these trusts are no longer deemed necessary and it may make more financial sense to close your trust.
In the past, if a will included a discretionary trust, this meant that the first spouse’s nil rate band was placed into trust. Now however, with the transferrable nil rate band, as a married couple you can transfer the amount of inheritance tax free allowance between each other. This means that after you both die, your joint estate may have the benefit of two tax free allowances.
If a discretionary trust remains in place, then it will need to be closed between three months and two years after your death, which can attract a substantial cost – much more so than if the will is simply redrafted whilst you are still alive.
There may also be the possibility that if your spouse lives at least another twenty years after your death, more tax will be payable on the final estate than there would be if the trust is closed now.
Contact the team at IWC Ltd who will be able to advise you of the best way to prepare for your discretionary trust to be closed.

Closing A Discretionary Trust

Although you and your spouse may have been advised to include a trust as part of your wills, these trusts became somewhat unnecessary after the introduction of the transferable nil rate band, in 2007.
If you entire estate was valued over £298,000 at this time, then it is likely that you were advised to include a Discretionary Trust within your wills. This would transfer you or your spouse’s nil rate band, giving the surviving partner maximum allowance on the estate. However since then, the introduction of the transferable nil rate band has meant that as a married couple, you can transfer that Inheritance Tax free allowance between each other, so the
surviving partner benefits from two tax free allowances.
Closing your Discretionary Trust now may mean paying less tax on the final estate, so you should take this opportunity to contact a will writer to discuss closing the trust and re-writing your wills.

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