Triple Trust Wills

What is a Triple Trust Will?

It is a Will that creates not just one, but three Trusts. We do this to make sure that assets can be protected, and the executors can also claim the Residence Nil Rate Band (RNRB) tax allowances on second death.

In addition to that, it means the RNRB allowances are not tapered unnecessarily, where joint estates total more than £2 million pounds on second death.

The first Trust is called a Nil Rate Band Discretionary Trust, which places £325,000 worth of assets into a Loan Trust on first death. And we call it a Loan Trust because the assets can all be lent to the surviving spouse, who can then invest or spend them as they wish.

The second Trust is called a Property Trust, which is an Interest in Possession Trust. It gives a life interest to the survivor in part of the property – usually £175,000 worth of the family home. It can then go directly to the children on second death and form part of the RNRB allowance.

The rest – the residue, goes into the third Trust, which we call a Flexible Family Trust. That Trust is a Flexible Life Interest Trust, which gives a life interest to the survivor in the rest of the property, plus any financial assets that were in the sole name of the first to die.

How does a Triple Trust Will ensure that the RNRB allowances are not tapered unnecessarily on joint estates totalling £2 million+ on second death?

I’m going into this in quite fine detail because people with these sorts of assets will want to do their research to make sure they’ve understood and everything’s been explained clearly.

The first Trust hives off £325,000 plus any growth on the assets on first death. These assets are then not included when calculating the gross estate on second death. Tapering of gross estates only starts at £2 million, not including the £325,000 that’s been hived off.

This would save £65,000 in inheritance tax (IHT) on a combined estate totalling £2,325,000. IHT would also be saved on the growth in value of assets in the Trust, which would otherwise have remained in the survivor’s estate.

In other words, the first Trust puts the amount of the tax-free IHT allowance into the sort of Trust that reduces the size of your joint estates on second death. It’s therefore more likely your executors will be able to claim the full RNRB inheritance tax allowances, and the Will is written in such a way that all the assets can be loaned to the surviving spouse. The surviving spouse can then save or spend them as they wish.

How does a Triple Trust Will protect assets?

As with Flexible Family Trust Wills, there are four common areas – care fees, remarriage, children’s divorce, and inheritance tax planning on a generational basis.

How does a Triple Trust Will protect assets with regards to care fees?

As you may have gathered, these Wills are aimed at married couples or civil partners. When the first person dies, half of the family home and some financial assets become the assets of two Trusts that give a life interest to the surviving spouse or civil partner, as well as the Nil Rate Band Discretionary Trust that I explained just now.

This prevents the local authority from being able to possess the property to pay for care fees, if the survivor needs long-term care.

It also protects the financial assets from being assessed as belonging to the survivor. Normally, if one person dies and the survivor goes into care, all the survivors’ assets, including the family home, can be grabbed by the council to pay the care fees.

However, a Triple Trust Will will protect at least one half of the value of the family home, as well as other financial assets.

How does the Will protect assets on remarriage?

If one person dies, and the survivor carries on with their life and gets remarried, they might marry somebody with children. If they then die first, then the estate will become diluted by this new spouse, and everything could end up going to their children.

With a Triple Trust Will, you can protect your half of the property and any assets you have in your sole name. Joint accounts would go directly to your partner on first death, but ISAs, pensions, etc., can be protected for your children.

How does the Will protect assets if children get divorced?

So far, I’ve explained what happens on first death. Now, we’re going to think about what would happen when both testators have died.

If the children get their inheritance directly and then get divorced, half their inheritance could end up with another person’s family.

In these circumstances, assets that have been inherited directly may end up in the ex-spouse’s family. But assets in the Flexible Family Trust and the Nil Rate Band Discretionary Trust are protected for the benefit of the bloodline and would not normally be treated as assets in any divorce settlement.

Your children can receive their inheritance as a loan from the Trust or Trusts created by your two Wills. They can spend or invest the money as they want, but the loan is repayable to the Trusts and not to the ex-spouse if they get divorced.

How does a Triple Trust Will help with inheritance tax planning after both testators have died?

Now we’re talking about what happens on a generational basis. Another way to put this question is to ask what would happen if your children inherit from you directly and they are already over the inheritance tax threshold.

In these circumstances, their estate may have to pay inheritance tax on the assets you’ve left them when your children die, even if they’ve already been taxed on your estate.

So, by putting assets into the Trusts created by your Wills, the children will be able to protect these assets from being lost through divorce or bankruptcy, and also leave the assets to your grandchildren (and beyond), free of inheritance tax.

The Nil Rate Band Discretionary Trust and the Flexible Family Trust can each continue for 125 years from the date they’re created. In that way, you can save inheritance tax on a generational basis.

Inheritance tax is 40%, so if you save that once, there’s a compound effect. Save it twice and it’s a huge amount of money.

In practical terms, what happens on first death?

Simply, one half of the property would be put into the names of the Trustees at the Land Registry. This is called implementing the Trust. In addition to that, any assets in the Trust, such as ISAs, possibly some pension assets and any sole assets owned by the first person to die, can be protected.

Will the survivor have use of the property and money?

Yes. This will be a relief to people who weren’t sure about that. Nearly all of our clients choose to have the cash assets loaned back to them and use them, invest them and get interest on them – they can enjoy them in the normal way.

By doing this, the cash you use will still be owned by the Trust, but outside your own estate. This is done by a loan agreement being drawn up after first death.

What happens if I don’t want to use the cash?

You could simply leave it in the Trust and access it with the consent of all the Trustees whenever required. That would be a normal thing to do if the beneficiary was on benefits or lacked capacity, or was vulnerable to gambling or drugs, for example.

However, it’s still usually recommended that you accept the loan of the cash from the Trust, so you can invest the money and let it grow.

What happens on second death?

Assuming the second Will remains as written, there are then two Trusts: the Flexible Family Trust and the Property Trust .

On second death, £175,000 would go directly to the beneficiaries, maybe your children, and the rest would be in the Flexible Family Trust of the second person to die. It would take up the rest of the assets of the second person to die and will continue until the Trustees decide to disband it, or it continues for 125 years.

It’s worth bearing in mind that there’s another Flexible Family Trust which was created on first death. That has given a life interest to the survivor and creates another separate Trust, which again allows the children to have their cake and eat it.

They can take all the money out, spend it how they like, but sign an IOU to say that they’ve borrowed the money from the Trust – so it can’t be lost if they later get divorced or become bankrupt.

Will I incur any future charges in the Trust?

Only after the death of the second to die, and only if there is more than £325,000 in any of the Trusts.

There is no tax to pay for the first 10 years, but if you keep the Trust going after the 10 year anniversary, there would be a 6% charge on anything over the £325,000 threshold. Make a note to contact us for advice nine years after the Trust has been implemented or created by the Will.

If the Trust is worth less than £325,000 – or exactly £325,000 – there is nothing to pay. With the first Trust in the Triple Trust Wills, the idea is that you could lend everything out to the surviving spouse on first death. Even if it lasts for 125 years and there’s just an IOU in it, there’ll be no tax, accountancy fees or administration fees to pay.

What happens if the Trustees no longer wish to continue the Trust ?

The Trustees can decide to disband the Trust whenever they wish. The estate would then be distributed to the beneficiaries according to the Will.

What else do we need to know about Triple Trust Wills?

Going on from what I was saying earlier, the Nil Rate Band amount, currently £325,000, appears to be the most convenient amount to hold in a discretionary Trust. Planning to establish Trusts holding this amount of assets at different dates could be the key to saving tax and administration costs in the future.

So Triple Trust Wills are aimed at couples with joint assets of more than £2 million, but they may be of interest to others if inheritance tax planning is the priority – because it hives off £325,000 on first death.

If there’s no income being generated, no capital growth and no exit charges, it’s a neat way of building up your assets of £325,000 to save tax and administration costs.

You can learn more about generational inheritance tax planning in our Bloodline Wills podcast and in the estate planning section of our website.