Trusts have a variety of different uses in wills. Most of these are relatively well known by will writers, however there are times where very specific facts could warrant the use of a trust. In this regular feature of the newsletter we will cover situations where a trust could be recommended to a client that you might not have thought of.
This week, we will look at a situation where you may consider using a discretionary trust where a beneficiary has an inheritance tax liability.
Brett has an estate worth £300,000. He wishes to leave this to his daughter Laura. If Laura dies before him, he wishes his estate pass to Laura’s children. Laura has recently sold a business and has an estate of £1,500,000.
What’s the problem?
Brett himself does not have an inheritance tax liability, but he is worried that leaving his estate to Laura will only make Laura’s inheritance tax liability worse.
Laura is currently unmarried. If she inherited Brett’s estate, her IHT liability would be:
- £1,800,000 – RNRB (£175,000) – NRB (£325,000) = £1,300,000
- £1,300,000 x 40% = £520,000
He has considered gifting his estate to Laura’s children instead, but would prefer if Laura does benefit from his estate.
Instead of leaving his estate to Laura outright, Brett could leave his estate to a discretionary trust with Laura and her descendants as potential beneficiaries.
A discretionary trust is a relevant property trust and is its own legal entity for inheritance tax purposes. The beneficiaries of the discretionary trust are not treated as owning the trust assets. Laura’s estate would therefore be unaffected and her inheritance tax liability on her death would be:
- £1,500,000 – RNRB (£175,000) – NRB (£325,000) = £1,000,000
- £1,000,000 x 40% = £400,000
The trustees of the discretionary trust could however provide occasional benefits to Laura, either outright or by loan to avoid worsening her inheritance tax liability. The discretionary trust itself would currently not have any ongoing anniversary or exit charges as it is below the NRB, but this would change if the value of the capital increased.
If the trust is still holding assets on Laura’s death, the trustees could either distribute outright to Laura’s children at this point or perhaps continue holding the trust capital depending on which is more tax efficient for the children at that time.
If you would like any further advice on this, please don’t hesitate to contact us at [email protected].