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Discretionary Trusts - Still an ideal tool for estate management

Tuesday, 10 November 2009

For the death of a surviving spouse or civil partner occurring after 7th October 2007 the transferable nil-rate band has meant that the previously popular nil-rate band discretionary trust is no longer required to ensure that there would be £650,000 (at current rates) passing free of Inheritance Tax to the next generation.

However, contrary to popular opinion there are still several excellent reasons to continue to use nil-rate band discretionary trusts and not just for Inheritance Tax saving purposes.

The nil-rate band discretionary trust is an infinitely flexible mechanism that allows for estate planning to be put in place to cover complex family situations. This could include situations where a person has been married more than once and there are children from previous relationships, where there maybe worries over divorce, bankruptcy or children's spending habits. Even if a discretionary trust is not required, funds can be appointed out within the two-year period without adverse consequences.

Finally, it is projected that this year alone local authorities will force the sale of over 50,000 homes to meet the costs of providing a person's residential or nursing home accommodation. A nil-rate band discretionary trust set up now could safeguard a property from being sold.

An individual or a couple could set up a discretionary trust during their lifetime and gift the home to the trust but continue to reside therein. Although the gift would be invalid for Inheritance Tax, under the Reservation of Benefit rules, as long as the house is part of an estate worth under the nil-rate band for an individual (or transferable nil-rate band for a married couple/civil partners) there is no tax to pay in any event. It is important to note that for such a scheme to work it is essential that action is taken when all parties are in good health and are not in need of residential or nursing care.

For further assistance please contact Head of our Private Client Department on 020 7611 4848 or by e-mail at nacheson-gray@rollingsons.co.uk to arrange a consultation.