It is a discretionary trust and is created by Will on the death of the first spouse and the capital assets of the deceased are then held in trust and pays any income generated to the surviving spouse for their lifetime. This is treated for Inheritance Tax (IHT) purposes as an outright gift to the surviving spouse. So it does not use any of the IHT allowance of the deceased spouse ? preserving it for later use on the death of the surviving spouse, (it is called the ‘transferable Nil Rate Band’). On the death of the surviving spouse the trust capital is either passed on to the nominated beneficiaries, such as the children, or can continue to be held for their benefit for the full perpetuity period of 125 years. Because the capital in the trust is not owned by the surviving spouse, it cannot be given away by them to say, a new husband or wife, and it cannot be assessed if the surviving spouse needs to end their days in a care home.
It is a Rolls-Royce solution in the World of Inheritance planning.
The trust includes powers for the trustees:
??????? i.??????????? To lend trust capital to the surviving spouse. So if they need capital, the trust can lend it to them ? with the capital being repaid either when the surviving spouse dies, or shortly before going into care.
????? ii.??????????? To give capital outright to the surviving spouse. It is unlikely that this power would be used because the capital would then be owned by the surviving spouse and could be given by them to a new husband or wife and would be assessed if they went into care. However, we are trying to create a flexible trust here to cover eventualities both foreseeable and unforeseeable ? and this power, for example, enables the trust to be wound up and the whole estate given outright to the surviving spouse if necessary.
??? iii.??????????? To pay capital to or on behalf of the nominated beneficiaries (the children, for example) so that if children need capital for whatever reason and the surviving spouse does not, (for example if the surviving spouse is in a care home and the children are in need of capital to reduce their mortgages), the capital in the trust could be paid to them.
??? iv.??????????? To convert some or all of the trust into another type of trust. So if, for example, the IHT laws changed and make it preferable for the trust capital to sit in, say, a Nil Rate Band Discretionary Trust, the trustees could do this. This power can also be used to transfer the assets of the survivor?s estate after their death into the FLIT trust set up on the death of the first spouse, thereby placing all of the couple?s estate into one discretionary trust that is controlled by their chosen trustees for the benefit of any of the remaining nominated beneficiaries.
There is no IHT to pay on creation of the trust, irrespective of the value of the trust. This means that the nil rate band of the first spouse to die is not used enabling the surviving spouse to qualify for a full 100% uplift of their own allowance on their later death.
The life tenant is treated as having an interest in possession in the capital value of the trust and it will form part of the survivor?s estate on their death for IHT purposes.
The procedure for setting up a trust will be the same whatever the trust is – the trustees will need to meet and set out any rules for running the trust and then decide how often to meet in the future. If the trust generates income they will need to notify HMRC of its existence and complete income tax returns every year. In such circumstances, creating a set of accounts every year would be a good idea.
Anything more will depend on what Trustees powers are / are not in the Will.
If you have questions, or would like to upgrading your Wills, please contact us now and we will gladly help and guide you.
