Discretionary Trust Wills

Prior to 9th October 2007, many married couples or civil partners with assets exceeding £325,000 (the current nil rate band) drew up Wills with a view to mitigating the impact of inheritance tax upon both estates. 

In order to do so, the Wills created a nil rate band discretionary trust. The idea was that the risk of losing the benefit of one nil rate band that was potentially available would be overcome by this.

What happened on the 9th October 2007?

On 9th October 2007, the Chancellor of the Exchequer announced changes to the way individual nil rate bands can be used, creating a transferable up-rated nil rate band.  On the death of the first spouse/civil partner, if everything is left to the survivor, the deceased’s unused proportion of the nil rate band can be transferred and up-rated to the surviving spouse or partner when they die.

The Importance of a Will with a Discretionary Trust

Couples with existing discretionary trust Wills should not rush to have them re-drafted though.  If it is thought advantageous, on the death of the first of the couple, that the estate should pass to the surviving spouse so that the nil rate band will not be used on the first death, then it will be possible for the trustees to make this appointment, provided it is done within two years of the date of death.

Furthermore, the discretionary trust can be very useful for more than just inheritance tax planning, namely for:

  • Residential care fees and means testing
  • Making best provision for beneficiaries  

Residential Care Fees and Means Testing

Under a discretionary trust, no beneficiary has the right to benefit; only the right to be considered for benefit.  The trustees have absolute discretion as to the distribution of capital and income from the trust fund among the potential beneficiaries named in the Will.

Should the surviving spouse/civil partner need future medical care, the fact that they have no absolute right to benefit from assets held in the trust, means that the Local Authority cannot take these into account when making any financial assessment as to how that care should be paid for.  These assets can therefore be protected for future generations.

Making Best Provision for Beneficiaries

There may be reservations about passing all assets to the surviving spouse or civil partner, particularly where there may be children from a previous marriage or partnership. 

A discretionary trust is a good way to ensure that they will be provided for in the future.  Also, at the time of the death the beneficiaries may themselves be:

  • In financial difficulties
  • Engaged in divorce proceedings
  • Lacking mental capacity to make decisions for themselves

In these circumstances as the beneficiary has no right to benefit, then those trust assets cannot be taken into account in relation to any proceedings in which they are involved, again protecting those assets.

Always choose Trustees carefully

It is always important to choose Trustees carefully.  Remember that trustees:

  • Have wide discretionary powers
  • Must be able to stay objective

Couples must be satisfied that trustees will wisely and sympathetically exercise their powers to both:

  • To the survivor of them
  • To those other potentially interested parties 

How professional trustees and a Letter of Wishes can help

Using professional trustees can often help, as they can give disinterested advice. 

It is also useful to make sure a Letter of Wishes is left. This document gives guidance and an indication as to how the deceased would want the trustees to act.  A Letter of Wishes can be added to or updated at any time.

Getting in touch

For more information, please contact David Endicott on 01295 204005 or email dendicott@se-law.co.uk