Does the Nil Rate Band Discretionary Trust have a place in 2024?
3. Asset Protection
The capital or income in the trust cannot be considered by the local authority when assessing care home fees or entitlement to means tested benefits.
Most people no longer need a nil rate band dis- cretionary trust in their wills. The trust may still be useful in the following circumstances: -
1. Reducing value of surviving spouse’s estate subject to inheritance tax
What is a nil rate band discretionary trust likely to cost ?
Assets left to the nil rate band discretionary trust do not form part of the surviving spouse’s estate. If the surviving spouse already has a particularly large estate, this is helpful in keeping the value of their estate down. Keeping the assets in the trust and away from the surviving spouse’s estate may also ensure their estate qualifies for certain IHT allowances on their death. For example, the residence nil rate band, an additional IHT allowance where an estate is left to a lineal descendent is reduced by £1 for every £2 the estate is over two million pounds. Assets placed in the trust that are significantly likely to increase in value can grow within the trust. If the assets were transferred to the spouse, those assets would form part of the spouse’s estate giving them an increasingly larger estate and exposure to inheritance tax.
The main drawback with this trust regime is they can be particularly complex to administer for the lay trustee who may require the services of professionals like solicitors or accountants to assist. The trust still maintains its own inheritance tax liability that arises (i) ten years from commencement of the trust and every ten years thereafter (the ‘ten yearly charge’ (ii) where assets are distributed from the trust (exit charges). Certain assets distributed from the trust may incur a CGT liability although it may be possible to postpone the CGT by rolling the gain out to a beneficiary. Income tax may also be payable if any of the assets in the trust produce an income e.g. rent from a property, dividends from shares or interest from a bank account. The trust has a higher rate of income tax than most individuals.
2. Flexibility and adapting to changing circumstances.
Conclusion
The trustees have the flexibility to review the family situation after death to decide which beneficiary(ies) to benefit from the trust. This can be useful where you have young or vulnerable beneficiaries or those that are unable to manage money wisely. The nil rate band discretionary trust affords greater protection to children from an earlier marriage. The risk of leaving everything to the surviving spouse is that the money becomes subject to their circumstances. The spouse may later remarry and have children of their own and use the money inherited from the predeceasing spouse to benefit their children or new partner only.
The decision whether to keep or even create a nil rate band discretionary trust will inevitably be subject to each individual’s circumstances. We take our time understanding our client’s estates and their personal circumstances to advise whether the trust is appropriate. We anticipate we will still see many nil rate band discretionary trusts resurface in 2024.
davina.puran@haroldbenjamin.com
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