Question about will / trusts/ inheritance tax

[Loueytb3]

Complicated situation which has the potential to cause a family feud.

DNan passed away a couple of weeks ago. It transpired that I am co-executor of the will with my DF. This was news to me. Will leaves lump sums to DF and me and my siblings. Then remainder of estate to go into a trust which will pay an income to my DF as long as he lives and then is split equally between my siblings when he dies.

So far so good.

DF wants to take legal advice to see whether we can organise a deed of variation so that either we don't set up the trust and split the money now (with him taking a cut as he loses any potential income) or we set up a trust containing less of the estate so that we use the max inheritance tax threshold. Again he would take a cut of this. This is so that a larger proportion of the money would go to us now when our children are little.

The estate is over the inheritance tax threshold. But if DNan intended to set up the trust to avoid inheritance tax, she didn't use the whole of threshold she could have done. She has mainly done this I think to avoid a large part of her inheritance potentially going to my DSM who she didn't get on with. I don't know whether she has had sound legal advice or not.

Now I am very confused about whether trusts incur inheritance tax any way after 10 years, in which case there isn't much to be gained by delaying the inevitable payment.

Also her second husband died a few years ago and I think that she will have gained some of his inheritance tax threshold if he didn't use it all. Is that correct?

[digerd]

When your Dnan's 2nd husband died, did he leave everything to her or was it shared with his children?

I think she did make her Will in this way to stop your DSM from inheriting anything from her estate and then leaving it to her family.

Between spouses there is no inheritance tax to pay when one dies, if the surviving heir is the sole heir, and both spouses are now deceased.

[Loueytb3]

DNans 2nd husband had no dependents or other relatives as far as I'm aware. He left it all to DNan.

[digerd]

From what I have read, this using thresholds for inheritance tax purposes applies to spouses only, not to children and GC inheritances.

But I could be wrong as not an expert.
Shame no expert has replied.

[OrangeMabel]

I'm no expert but I do know digerd is wrong about IHT thresholds.

If a man dies and leaves his entire estate to his wife then her estate will be able to use his allowance as well as her own, regardless of who the beneficiaries are.

Therefore DNan's estate can have up to £650,000 (i.e. 2 x £325,000) free of IHT.

[prh47bridge]

That only applies if DNan's husband second husband died since October 2007. If he died before then her estate only has £325,000 free of IHT.

[digerd]

I really do not understand the reason for this new inheritance law since 2007. Does that apply to all married couples, that ineffect the heirs get a £650.000 tax free inheritance when both parents are deceased?

@ prh47bridge

[prh47bridge]

The rule is that any unused IHT allowance from the first spouse or civil partner to die can be transferred to the surviving partner. If the first to die leaves everything to the survivor it is exempt from IHT so the full allowance can be transferred to the survivor even if they subsequently remarry. However, if the first to die leaves some of their estate to people other than the surviving partner they will have used up some or all of the IHT allowance so there will be less to transfer.

As for the reason, being cynical, Gordon Brown saw that the Conservatives' proposal to raise the IHT threshold was popular despite his party's attempts to brand it as a tax cut for millionaires, hence the introduction of this rule.

[timidviper]

This sounds like you need to take sound legal advice as to the implications of all this. You don't want to do something which means you lose out in the long run. Your DNan may have taken advice and done things this way to keep money from going to your SM and her family and your DF could be trying to get around it to keep SM happy.

[AuntPepita]

Transferable allowance is due whether the spouse died in 2007 or 1917. That's why HMRC publish IHT rates and bands back to 1914.

[AuntPepita]

Ok, so your nan has a nil rate band of £650k. No matter who she leaves this to, in trust or not, assuming it is not business property etc, it will suffer IHT at 40% in excess of that now.

If it is left to a trust, it will also suffer IHT every 10 years at a maximum rate of 6% in excess of the nil rate band. If it comes out of the trust before 10 years it will suffer IHT at a proportion of the 6% based on the amount of time elapsed, again subject to the nil rate band.

She probably did it this way for asset protection, rather than tax saving, if there are issues with blended families.

All the affected beneficiaries would need to agree to the variation.

But you cannot rely on advice from strangers on the Internet (however impeccable their credentials ). Get thee to a lawyer. Preferably one who is STEP qualified.

[Lawabidingmama]

The trust assets will still be liable for inheritance tax. There are further taxation implications of putting assets in trust. You refer to '10 years' in your OP there is a ten year charge on certain trust assets. This is a complex area you need proper advice.

A pp said that the uplift to the nil rate band can only be claimed if the spouse died post oct 2007 this is incorrect. It is the deceased whose estate is claiming who must have died after oct 2007. So on the facts yes you can claim the 100% uplift.

In terms of your grandmas wishes she likely had her reasons for this set up in not wanting your df to take the inheritance entirely. It could well be to keep the assets out if your DSMs hands.

[digerd]

prh47bridge
Thank you for replying.

So, the Inheritance Tax free Allowance was increased to £650.000 in the circumstances you stated.
Still don't understand the condition of the surviving spouse being sole heir and doesn't apply if there were other beneficiaries?

Therefore, I assume to claim the £650.000, the Will of the previous deceased spouse must be produced as proof?

[prh47bridge]

There is a form to fill in so that you can claim the unused portion of the deceased spouse's IHT allowance. And yes, you have to provide the will of the first deceased spouse along with various other documents.

The point about the surviving spouse being the sole heir is that there is no IHT payable on any part of the estate inherited by the deceased's spouse or civil partner. So if the surviving spouse inherits everything there will be no IHT to pay at all on the first death, leaving the entire IHT allowance intact.

So imagine Mr A dies and leaves his entire estate to Mrs A. The bequest to Mrs A is exempt from IHT. There is therefore no IHT to pay regardless of how much he leaves. He hasn't used any of his nil rate band so Mrs A can leave up to £650,000 without paying any IHT.

Now try a different situation. Mr A dies and leaves £200,000 to his friends with the rest going to Mrs A. There is still no IHT to pay as the bequest to Mrs A is not subject to IHT and the bequests to friends are below the IHT threshold. However, he has used £200,000 of the nil rate band for the bequests to his friends so there is only £125,000 available to transfer to Mrs A. She can therefore only leave up to £450,000 without paying IHT.

[Loueytb3]

Ok - so I am fairly sure he left everything to my DNan. My DF has his probate certificate but I don't know whether he has his will. He died in 2009 (i think) so its likely that his will would be with my DNans belongings. It may be that the probate certificate is enough.

My DNans estate is quite large but under 650k so it sounds like it would be exempt from IHT, whether in a trust or not.

My DF is going to see a solicitor on Tuesday to get some initial advice - he hasn't even spoken to anyone yet. He didn't know about the possible increased IHT level. Apparently he has read loads of stuff on the HMRC website but hadn't come across that.

My feeling is that my DSisters want to free as much capital as possible now. It would mean that my DF would get a larger cut of the pot as he has said he would be forgoing the income from the trust but I don't think it's worth arguing about tbh.

[Xenia]

If it is all below the IHT level as the previous death did not use up any of the other spouse allowance then the decisions made may be for reasons other than tax. So if your DF basically wants the children to have the money sooner when they need it which is makes a lot of sense then varying the will in that way may be wise unless the DF might need more of the money. He might live to 120 and need every last penny and rue the day he did not go with the trust and gave more to the children now.

[Loueytb3]

He doesn't lose either way. The will as it stands already gives him a lump sum of £120k plus the income from the trust (although I don't know how much that would be). He is suggesting he forfeit the income from the trust but is given some of the remaining pot. I can't see that he actually needs more money. He's mortgage free. He may well live for another 20yrs which is why he thinks its too long for us all to wait for the bulk of our inheritance.

[Xenia]

I see. Well it certainly can seem a bit complex to biother with a trust and trustees and the time and hassle. However if the family will not agree to buy him out of the trust income and he insists then it will have to go ahead as planned as a trust.

When Princess Diana died her win was changed after so her sons inherited and as people all agreed that could go ahead (there was a slight complication over a letter of wishes which went to court). However you need 100% agreement of those who will benefit to make the change so just negotiate with him. Interest rates are very low now so buying out his trust income may be not too expensive although if he will live for 40 years to 101 and if interest rates in that period might reach 15% (they have in the past) then it may be more expensive.

[Wuldric]

I thought very carefully and took proper advice before setting one up through my will. I would strongly suggest that you take proper legal advice now.

The reasons I set up a trust through my will (despite the fact that they are expensive to maintain, in terms of ongoing care and returns and taxation) were twofold:

1. To protect the monies for my children, should my husband decide to remarry and either have more children, or make a will that left his assets to his second wife.
   

1. To avoid inheritance tax legitimately and lawfully - the income has already been taxed on the way in, it seems inequitable to tax it again on the way out.
   

By far the strongest motivator for me was #1. If the inheritance argument does not apply to you, perhaps the original thinking was something like #1 - and looking at the existence of a step mother in the chain, that sounds as though it was part of the thinking.

Whether or not you enter into a deed of variation depends upon the terms your father is offering.

[cherrybakewall]

BTW you will be able to get a copy of the will and the grant of probate for DNan's husband from the Probate Registry so you can check where his estate went. Cost £6.