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 Nil Rate Band Discretionary Trust when drafting a will for a remarried widow.
Harry is a widow. His late wife Jenny died in 2015 and left all of her estate to him. Harry has since married Mary, who has never been married before. They own their home jointly which is valued at £500,000. They both individually have assets worth £500,000. They wish to pass their estates to each other and onto Harry’s children on second death.
Mary dies in October 2019 and Harry dies in March 2020.
What’s the problem?
Under S8A Inheritance Tax Act 1984, a person can only benefit from one single additional nil rate band (NRB). Harry has been widowed twice and both his late spouses have not used their NRB. On Harry’s death, his estate can only benefit from the one NRB meaning the second has been wasted.
His estate would benefit from 2x NRBs and 2x RNRBs (totalling £1,000,000) and £500,000 would be taxable at 40%. £200,000 in IHT would therefore be payable.
Both Harry and Mary could have included Nil Rate Band Discretionary Trusts in their wills to fully utilise the NRBs.
As Mary has died first, on her death assets up to the NRB would pass to the trust and her NRB would be used. Assets in the trust however are not part of Harry’s taxable estate when he dies. On his death, he would instead own £1,175,000 of assets. He would benefit from his NRB and RNRB and the unused NRB and RNRB from Jenny. £175,000 would be taxable at 40% and the IHT would therefore be £70,000. The use of a Nil Rate Band Trust would save them £130,000 in IHT.
On the other hand, if Harry had died first his trust could take assets worth one NRB. This would leave his second NRB available to transfer to Mary to be used on her death.
If you would like any further advice on this, please don’t hesitate to contact us at [email protected].