Nil Rate Band Discretionary Trust Wills
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Nil Rate Band Discretionary Trust Wills
Ian Winterbotham explains Nil Rate Band Discretionary Trust Wills.Introduction
Let’s start off by saying that we’re talking about will Trusts and not lifetime Trusts. These Nil Rate Band Discretionary Trusts are created by a Will when someone dies.
Nil Rate Band Discretionary Trusts have been used in Wills for a very long time. Inheritance tax in its current form was introduced in 1986, and Nil Rate Band Discretionary Trusts have been used to save inheritance tax ever since.
What is an example of a nil rate band and what is a Discretionary Trust?
The nil rate band, also commonly referred to as the inheritance tax threshold, is the tax-free allowance that can be applied to a person’s estate after they die. The nil rate band is currently £325,000 per person, meaning each person’s estate up to the value of £325,000 is free of inheritance tax and is left for the beneficiaries to enjoy.
The named Trustees can decide who benefits from the capital and the income when the assets are distributed. That’s what a Discretionary Trust is.
How does a Nil Rate Band Discretionary Trust work? Why use a Nil Rate Band Discretionary Trust?
Nil Rate Band Discretionary Trusts are most commonly included in Wills for unmarried couples whose estates are valued over £325,000 – that’s including property, cash savings, etc.
A well-written Will can potentially save up to £130,000 in inheritance tax, plus any growth in the value of the assets. Without a suitable Will, tax would be paid upon the death of the surviving partner.
As a little background, the rules were changed in 2007 for married couples. The rules now allow their executors to claim the nil rate band and the transferable nil rate band for the deceased spouse on the second death.
So typically these types of Trusts are used to protect assets rather than to save inheritance tax in the Wills for married couples. There is an exception to this, in that they can be used to save significant amounts of inheritance tax for married couples whose combined estates are valued between £2 million and £2.7 million.
It’s probably beyond the scope of this podcast, but that relates to something called the residence nil rate band which we can talk about at a later date. This podcast is aimed at people who want to understand Discretionary Trusts, specifically for unmarried couples.
Does a Discretionary Trust avoid inheritance tax?
In many cases, Nil Rate Band Discretionary Trust Wills can protect assets and save inheritance tax, particularly for unmarried couples. They can also save inheritance tax on a generational basis for married couples.
So although they’re not effective in saving inheritance tax on the parent’s death for married couples, this type of Trust will protect the assets for their children and grandchildren. It will be of particular benefit if the children are likely to be over the inheritance tax threshold themselves, or if there’s any possibility of them getting divorced in the future.
The Trust allows the children to ‘borrow’ all the assets without them ever becoming part of their taxable estates.
My will has a Nil Rate Band Discretionary Trust in it – should I change it?
The simple answer is you should definitely review your will. It will always depend on the specific circumstances.
We strongly recommend that you review your Nil Rate Band Discretionary Trust Will if you are married and the Will was made more than 15 years ago. That’s because of the rules changing in 2007. Many people instructed these Wills to save inheritance tax, but there are now more suitable Wills for married couples.
What are the advantages and disadvantages of a Discretionary Trust? Are there benefits in keeping a Nil Rate Band Discretionary Trust in your will?
Yes, there are benefits, and they relate to marriage after death, divorce of a beneficiary, bankruptcy and potentially to save care fees.
If the surviving partner does go on and marry, a will can ensure that the assets remain accessible to only the surviving past partner and other beneficiaries of your choice – for example, your children, who may otherwise not inherit in future.
There are other Trust Wills we can offer which would provide the same protection, but a Nil Rate Band Discretionary Trust offers these protections as well. It includes what happens if your children get divorced in the future or become bankrupt. Or, if they indeed need to pay care fees themselves.
A will can avoid the inherited assets from being included in a beneficiary’s divorce settlement, from creditor claims or from bankruptcy, and from being included in the calculation of assets in assessing an individual’s care costs.
The disadvantages are that you’re leaving discretion to your Trustees, which relies on them doing what you want and following your wishes. You will want to know that you can Trust your Trustees.
For married couples, Property Trust Wills and Flexible Life Interest Trust Wills can offer more certainty to the surviving spouse, without giving up the inheritance tax benefits. We talk about these types of Trust Wills in different podcasts.
What is the Nil Rate Band Discretionary Trust charge scheme?
This question is asked because there can be a 10 year anniversary charge to pay so that the assets are charged every ten years. But it doesn’t apply if the nil rate band of £325,000 is the maximum in the Trust at any one time.
Alternatively, a different type of charge can be put on the property so that property assets can be loaned to a surviving spouse or partner so that the 10 year anniversary charge would not apply. A complicated answer to a simple question! It probably needs further discussion with a professional.
Does a Nil Rate Band Discretionary Trust include the residence nil rate band?
The residence nil rate band is a completely different allowance and it can be claimed in addition to the nil rate band allowance. The residence nil rate band allowance is conditional on leaving property directly to children – or the proceeds of property if the property has previously been sold.
It’s worth noting that the residence nil rate band of £175,000 worth of allowances would not be available for an unmarried couple on first death, where the family home is inherited by the surviving partner.
So again, this gets us into a more complex situation, where you would really benefit from discussion with a professional Will Writer like us.
How can unmarried couples avoid inheritance tax?
A Nil Rate Band Discretionary Trust Will can potentially save up to £130,000 pounds in inheritance tax plus any growth in the value of the assets.
Most couples own their homes as joint tenants, so on the first death the house passes automatically to the survivor. However, this limits the planning that can be undertaken. If the joint tenancy is severed and the property is held as tenants in common instead, each individual is free to use their Will to direct how their interest in the house should pass on their death.
Many couples will want to provide for their partner as a priority, and can still achieve this without leaving all the assets to the surviving partner directly. A Nil Rate Band Discretionary Trust in a Will can also be used to provide protection for the assets while still giving the survivor access to them.
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Nil Rate Band Discretionary Trust Wills (Part 2)
Continuing the conversation about Nil Rate Band Discretionary Trust Wills with Ian Winterbotham.What is a nil rate band discretionary trust 10 year charge?
So we’ve now moved on to the stage of what happens after a death has occurred and we’re administering the estate. If the assets in the nil rate band discretionary trust exceed £325,000, there could be a tax to pay after 10 years, of about 6% of any growth in the value of the assets above that nil rate band.
There is a way of avoiding this, and that’s why these trust Wills are called loan trust Wills. The way to avoid it is to loan the assets to the beneficiaries, without any interest being payable. That way we can legally avoid the 10 year charge.
What are the tax implications of winding up a trust?
There can be exit charges on the growth in the value of the assets, rather like a capital gains tax. But this is avoided if the assets are loaned to the beneficiaries without interest being payable.
What should you consider when winding up a Trust?
The assets will no longer be protected by the Trust. So if someone who winds up the trust wants to take the money without the trouble of administering the trust, they could potentially be in danger of losing the money if they later get divorced, or their business goes belly up and becomes bankrupt. The Local Authority could also then grab the money to pay for care fees.
Also, more and more now, as people become older and more vulnerable they can fall victim to ‘predatory remarriage.’ That’s where someone sees that you’ve got all these assets and befriends you. Your children could lose their inheritance that way. It’s really about protecting assets.
Can you have a discretionary trust with a power of appointment? What is a deed of appointment appointing out on a discretionary trust?
To the average person that will probably sound like total jargon, but it really just refers to whether the trust allows the trustees to appoint out assets. That is the same as transferring assets to the beneficiaries – or gifting assets out of the trust.
Our nil rate band discretionary trusts give many powers to the trustees including the appointment of assets. So yes, you can have a discretionary trust with a power of appointment.
How much does a deed of appointment cost?
To appoint assets out of the trust is usually between £150 and £300 plus VAT.
Can a trustee remove a beneficiary from a discretionary trust? What rights do beneficiaries have under a discretionary trust?
While trustees do not have the power to remove a beneficiary, they do have discretion. They have the power to ignore a beneficiary. They’ve got a fiduciary duty to consider all the beneficiaries fairly. Beneficiaries could take them to court if they thought they were not being dealt with fairly.
But they do have discretion to give the assets to some beneficiaries and not to others. It’s recommended with these nil rate band discretionary trust wills that you should add a letter of wishes to give guidance to your trustees.
Is it better to leave inheritance in a trust?
It depends on the circumstances. It’s a good idea to leave an inheritance in a trust if you want to protect your assets and make sure that they can be preserved for future generations.You can leave an inheritance in a trust to make sure it couldn’t be lost if your children got remarried or became bankrupt.
It’s important to leave an inheritance in a trust if you want to make sure the local authority can’t take those funds to pay for care fees for the survivor or for the beneficiary. It really requires discussion and consideration.
Who can or must make an application for a restriction after the creation of nil rate band discretionary trust?
This relates to property. Very commonly, part of the family home will be left to the children or other beneficiaries. After someone’s died, the names of the trustees can be added at the Land Registry.If that’s done with a reference to the nil rate band discretionary trust Will, that part of the property cannot be lost to pay for care fees, or on remarriage or bankruptcy etc.
