Friday May 9, 05:50 PM
Leftover from an earlier generation still has a useful role to play
By Alice Ross
There has been much debate over the future of discretionary will trusts, now that inheritance tax allowances can be transferred between married couples and civil partners. But some advisers say they still have their uses. The Chancellor announced
in the pre-Budget report last October that any unused nil rate band for inheritance tax on the death of the first spouse could be added to the nil rate band of the second spouse when he or she died.Effectively, this means that up to £624,000 can now be passed down to the next generation with no tax after both spouses have died. Any amount above that is taxed at 40 per cent. Previously, couples wanting to double their inheritance tax allowance had to set up a discretionary will trust, which put the allowance of one spouse in a trust when he (or she) died so that it fell outside the estate of the second spouse, allowing heirs to effectively benefit from two allowances. So, when the new rules were announced last year, many predicted that discretionary will trusts had no further use. But Julie Hutchinson, head of estate planning at Standard Life (LSE: SL.L - news) , says: "At legal conferences, there are split views on this. There is no longer a 'one size fits all' solution here." One valuable use of a discretionary will trust is with remarriages when a former spouse has died.Up to four nil rate bands could be preserved this way, if both new spouses were previously widowed, says Graeme Clark, head of private clients at Courtiers. Currently, one person is not allowed more than two nil rate band allowances. So if a wife, previously widowed, wants to pass both her allowances to her second husband when she dies, she needs to set up a discretionary will trust worth £624,000. If the husband also had two allowances, then on his death as much as £1.24m could be passed down to heirs with no inheritance tax, plus any growth that had already occurred in the trust. It is also a way of ensuring that children, as well as the surviving spouse, can benefit. Hutchinson says: "You might want to pass assets on to your kids from a previous relationship, otherwise they'd have to wait until the new spouse dies before they can access your estate. So then a discretionary will trust might be best as you can allow a balance of access between your spouse and children." But she warns that a certain amount of goodwill has to be assumed. Since the trust is discretionary, there can be no set rules on what proportion of its assets go to which beneficiary. In acrimonious cases, it might be better to appoint an independent trustee from a law firm to make sure everyone's interests are respected. The downside to this is the costs involved, as the law firm would charge for administering the trust. Another option, says Clark, is to take out a life interest trust, which is often used on remarriages. This gives the second spouse the income from the trust with the capital then reverting to the children from the first marriage after the second spouse dies. Hutchinson says a further reason to use a discretionary will trust is if the surviving spouse has her own business. If the estate were left directly to her, any creditors might be able to attack those assets if the business failed. Hutchinson says: "It might be better to leave the assets in a trust, so she can have access to them but they won't form part of her estate." Another point to bear in mind, says Paul Wilcox, chairman and technical director at the Way Group, is that the assets put into the trust will probably grow faster than the nil rate band itself, which tends to increase with inflation. Last tax year, the nil rate band was £300,000 for one person and now it has increased to £312,000 - but with good investment management, £300,000 in a private portfolio would be expected to do better than that. For those who had set up a discretionary will trust before the new rules were announced, there are two routes available. Hutchinson says that if the trust were created less than two years before the first spouse died, it can be dissolved and the assets passed straight to the second spouse. This is more straightforward and less expensive to administer. If the date of death was more than two years ago, nothing can be done. But if neither spouse has died,there is a way of getting rid of the trust when one person does die, so no action need be taken now. The only drawback, says Wilcox, is what might happen if a new government comes into power. The Conservative Party put forward proposals last autumn to increase the inheritance tax threshold to £1m and also allow it to be transferable. If someone died having put only £312,000 of their estate into a discretionary will trust now, because they had used 100 per cent of their allowance, the remaining £700,000 could not be passed over to their spouse if the limit increased in the future. Wilcox says: "It comes down to whether one feels better taking action by doing the planning now rather than leaving things open and hoping for the best."
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