Nil Rate Band Discretionary Trust Wills

A professionally drafted will from Will Power can save you a significant amount of money in the long run, and protect your loved ones from stress and heartache – at a time when they are already dealing with bereavement and funeral arrangements.

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Nil Rate Band Discretionary Trust Wills

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.
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A professionally drafted will from Will Power can save you a significant amount of money in the long run, and protect your loved ones from stress and heartache – at a time when they are already dealing with bereavement and funeral arrangements.

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.