A will trust can either have a fixed interest or be discretionary. Under a will trust with a fixed interest the first beneficiary has a specific proprietary right to the income of the trust.
In contrast, a discretionary will trust gives the trustees the power to distribute income and capital held in the trust in accordance with your wishes, but at their discretion, to the beneficiaries. A discretionary will trust provides flexibility and accords benefits in specific situations.
Uses of a discretionary will trust
1. You choose who benefits from your assets and under what circumstances. For example, if you have a second marriage you may want to ensure that your second wife is provided for during their lifetime but at the same time to ensure that children from your first marriage are not unfairly treated in the future.
2. If you leave your share of your house to your spouse and at a later date they have to go into residential care, the house may have to be sold to pay for the care home fees. If alternatively you leave your share of property in trust then only their share of the property will be assessed by the local authority.
3. Assets can be protected should your children or beneficiaries be likely to divorce or get into financial difficulties.
4. Disabled children or beneficiaries can be provided for and your trustees can make payments as and when appropriate so that benefits paid by the state are not stopped or reduced.
5. You may be able to limit the inheritance tax paid on your death although a liability to capital gain tax arise.
Appointing trustees of a discretionary trust
The trustees are appointed by you and they will manage the trust in accordance with your wishes but using their discretion to distribute monies.
You must choose your trustees carefully because they will invest and manage your assets. You should also leave a letter of wishes stating your aims for the trust as this will guide your trustees in the exercise of their discretion.
Discretionary will trusts used by spouses for inheritance tax purposes
Before 2007, many married couples used a discretionary will trust to take advantage of significant inheritance tax savings. In October 2007 the nil rate spouse relief was introduced with immediate effect which relaxed the usage of the nil rate band for inheritance tax between spouses and same sex couples who have registered their civil partnership.
This means that the surviving spouse or civil partner is able to make use of not only their own nil rate band, but also any unused proportion of their late spouses nil rate band. The legislation will in most cases negate the need for nil rate band discretionary trusts in spouses’ wills.
As the change was backdated indefinitely it may be helpful to explain how the relief now works and how the change effects a will drafted before 9th October, 2007.
How the nil rate spouse relief works
Before the new relief was introduced, when a surviving spouse died only their own nil rate band of £325,000 was available. A couple now shares a joint nil-rate band of £650,000 so that any relief not used when the first spouse dies is available to the surviving spouse.
The new relief will enable a married couple with a combined estate of £650,000 to potentially reduce their overall inheritance tax liability by £130,000. It is estimated that the change will benefit 12 million couples.
The size of the unused allowance will be based on the nil-rate band threshold at the time of the second death not the lower threshold when the first spouse died.
The change in the legislation should not constitute a problem for couples who currently have wills that include such trusts. If a person dies with a nil rate band discretionary trust in their will and it is concluded that there is no benefit to keeping the trust in place it can simply be wound up in favour of the surviving spouse.
Using a solicitor
Whatever the purpose, the mechanics involved in setting up a will trust can be complex particularly as it should be tailor-made to suit your needs. There are also tax considerations to take into account. We therefore suggest that you should seek professional advice from a solicitor.
The information which we provide through Lasting Post is in outline for information or educational purposes only. The information is not a substitute for the professional judgment of a solicitor, accountant or other professional adviser. We cannot guarantee that information provided by Lasting Post will meet your individual needs, as this will very much depend on your individual circumstances. You should therefore use the information only as a starting point for your enquiries.