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 to give someone a short-term right to occupy.
Mr Patel is unmarried and owns assets totalling £450,000, including a property worth £200,000. He wishes to leave all his assets to his children on his death but allow his partner to continue living in his property for eighteen months following his death to ensure that she has enough time to find alternative accommodation.
What’s the problem?
A right to occupy trust could be used here to guarantee that the partner can continue to live in the property for eighteen months, however this would have IHT consequences to the estate and possibly to the partner. The partner would be treated as inheriting the trust property for IHT purposes. When considering the consequences to the estate, this would mean that the RNRB would not be available on Mr Patel’s death. On the current value of the estate, this would cause an IHT liability.
|Mr Patel’s Estate||£450,000|
|Minus NRB (£325,000)||£125,000|
|Taxed at 40%||£50,000|
If the partner died within the trust period, the property would be treated as part of her estate for IHT purposes. If she did survive the trust period, the gift to the children at the end of the trust would be treated as a potentially exempt transfer from her own estate.
As the trust is intended to last less than two years, Mr Patel could consider using a discretionary trust instead. The trust should name the partner and Mr Patel’s children as potential beneficiaries of the trust and a letter of wishes should guide the trustees on how they should act.
A discretionary trust is a relevant property trust, and for IHT purposes it will be treated as inheriting the trust property on death. However, due to the reading back rules contained in S144 Inheritance Tax Act 1984 any appointments to a beneficiary from the trust within two years of the testator’s death will be treated as if the will had gifted the assets to the beneficiary.
The trustees could allow the partner to continue living in the property for eighteen months, and then distribute the property to the children and end the trust. As property has been appointed to the children within two years of death, they would be treated as inheriting the property for IHT purposes and RNRB would apply. This would reduce the IHT liability of the estate to nil.
The only disadvantage of this approach is that the partner’s ability to live in the property is now dependent on the trustee’s discretion, rather than guaranteed as it is under the right to occupy trust. We would recommend independent trustees are considered.
If you would like any further advice on this, please don’t hesitate to contact us at [email protected].