Implications of setting up a trust will - IHT

[trustornotottrust]

My Mum recently died. Both my Mum and Dad were about to change their will but she died before they got around to doing it.

My Mum and Dad owned their main residence as tenants in common. Her share is worth £250k and goes to myself and two brothers with my dad having a lifetime right to live in property. Everything else went to my Dad. So she effectively used her £175k allowance for main residence and £75k of her other allowance leaving £259k allowance to pass to my dad on his death

Myself and my brother are in settled marriages but my younger brother is currently seperated from his wife and financially she has said that she wants to get as much as possible from him

Dad had appointment with the Co-op legal services yesterday and the solicitor advised a discretionary? trust so that if my Dad died while my brother was still going through a divorce, we could delay the distribution of assets until it has been completed. Myself and two brothers are both sole beneficiaries as well as potential trustees of this trust. In real terms, sorting out my Dad's affairs on death will fall to me for various reasons.

However, I had a brief look at discretionary? trusts and I am really not clear as to whether they type of will makes us liable to more tax? It seems very complex.
While my Dad would want my brother to keep his inheritance and it not to go tohis wife (they don't have children) he would not want this at the expense of their being a greater tax liability when he dies.
I know that the CO-OP pushes trust wills because they cost more.
Please can anyone advise? My Dad is not great with financial stuff and will just be happy to pay his money and forget about it but I am worried that I will be left with a nightmare on his death.
My Dad really doesn't have a complex estate, two properties, savings and ISAs that it is.

Firstly, sorry about losing your mum - it’s a hard time isn’t it?
With regard to your dad, make sure you have Power of Attorney for financial affairs for his asap, so that if he loses capacity at any point in the future you can still manage his money. This is vital should he need residential care and the house needs to be sold. You do t need a solicitor to do this, it’s simple to do online.
Regarding his will, I think it would be far better for your DF to leave his estate to you and your brother, leaving out the divorcing brother. You can then do a couple of things. After the divorce and financial order is completed, your DF can change his will again to leave his estate to all of you, or should he die before the divorce is finalised, a deed of variation could be completed. You can make changes either before or after the executor gets the grant of probate to start administering the estate. For tax reasons, however, any changes must be made within two years of the person’s death.
Either way, your brother needs to get his skates on to finalise his divorce!

@trustornotottrust I'd love to understand this as I can't understand why someone in my family set up a will trust .
Why do you think it might mean more tax is possible?

Thanks for this - we are doing a POA at the moment for health and financial. In regards to my brother, they are still living in the same house and this is about the third time they have been about to divorce, then they stay together. I can imagine them getting back together - only for it to kick off further down the road.
There is no way my Dad wil write a will leaving by brother out no matter the circumstances, he would just accept that his wife would take half.
I am now worried that this is all going to fall to me. I have no problems dealing with a will and probate on death, but I don't get these trusts and tax implications. If brother is divorced at the time of his death then we would just settled the estate asap splitting it three ways.

Also my Dad agreed to do the POA through the CO-OP both health and finances for £700! I would have told him we can do it outselves. The problem is I have his best interests at heart more so than a solicitor who is probably trying to upsell his products but I would be seen to be influencing his decisions!

AFAIK discretion Trust doesn’t involve more iht, if a couple are married and one dies the iht is due on their death rather than the more usual leave everything to spouse and all IHT due on second death…but amounts and allowances the same.

your situation is different as your mum is already gone (sorry) so there’s no issue. When your dad dies the tax is payable on the estate minus his allowance and what’s left of your mums. Remainder goes to trust to pay out as and when trustees see fit (post divorce). I don’t think there’s any tax to pay on money in the trust although there might be on any income (interest etc ) to the trust…but you’ll wind it up pretty quickly after divorce final anyway!

£700 for a POA - that's seems a lot for something that's straightforward to do yourself.

If you Dad died before your brother finalised everything I'm not sure he would have to split the inheritance anyway? Doesn't it just depend?

What about seeing a tax advisor who specialises in trusts and IHT

Trusts are expensive to set up.

I'd be tempted to keep things simple and not do a trust and let whatever happen happen.

In that case, it’s really on your brother to make his choice - does he push the divorce through or not. Any inheritance he may receive is his to do what he wishes with. By staying married he is, in effect, choosing to potentially hand over half of his inheritance to his wife.
Assuming all of you are married, any of you could end up with this situation should your spouses choice to divorce you after you receive an inheritance. I would speak to your dad and point out that he can’t ultimately retain control over his estate without complex involvement from a solicitor. I have recently read a few things about the Coop legal services that make it look like they employ a hard sell approach. They also employ paralegals as they are cheaper than fully qualified solicitors! Maybe your DF should see an independent local solicitor for a second opinion?

All the more reason to get independent advice! £700 is absolutely shocking!

@trustornotottrust "However, I had a brief look at discretionary? trusts and I am really not clear as to whether they type of will makes us liable to more tax? It seems very complex."

It is. The trust will only be liable to more tax if it exists for more than ten years or the trust sells an asset (eg a house) more than two years after it was created.

There are also complications about paying inheritance tax and then having to claim it back if a beneficiary is a child or spouse.

If the house is put into a discretionary trust then you do not get the £175k tax free residence nil rate band. But, if the house is sold and the assets distributed within two years then you can reclaim any inheritance tax paid on that £175k if appropriate.

Frankly, it may be better to have a will that leaves one third each to you and your elder brother absolutely and then leave your younger brother's third in a discretionary trust.

I find it all so confusing, he was only intending to change one asset to be be shared between my two brother only (and exclude me) and has ended up with a different sort of will because of my brothers situation. I had a quick google and there is something about exit charges if assets are not distributed within two years etc. My Dad said you don't need probate with this sort of will but then wasn't sure. He really doesn't know enough about it and has just paid over £1k for the power of attorney and this new will. Personally, I would prefer to be removed as executor or trustee in the case of this will and leave it to my brothers to sort out. Sick to death of my brother's relationship dramas and this seems to be the sole motivation for this discretionary will.

I have discussed it with my Dad and he got mardey with me and said I'll just spend all the money! Before my Mum died she said that she wanted to change the will so that one of the assets was shared between my brothers only and I was excluded, for various reasons. I was ok with this and I actually arranged the will appointment for my Dad (on his request) so he could make this change. When I said I was concerned about being an executor and trustee of this sort of will but I don't understand the paperwork/processes required he got annoyed, hence the above comment. I've helped him deal with all his finances since my mum died, dealt with mums probate and encouraged the writing of the new will even though it reduces my inheritance by £70k! If I was a lesser person and he asked me to help arrange a new will I would have said tomorrow, tomorrow but instead I have made sure it is done so that my Mum's wishes are carried out. Only to be treated like all I care about is money. So angry and hurt and upset.

"There are also complications about paying inheritance tax and then having to claim it back if a beneficiary is a child or spouse.

If the house is put into a discretionary trust then you do not get the £175k tax free residence nil rate band. But, if the house is sold and the assets distributed within two years then you can reclaim any inheritance tax paid on that £175k if appropriate"

This is the bit that concerns me. My Dad's property is in a new development and exisiting homeowners are finding it hard to sell their properties due to so many new ones going up with great deals. It is highly likely that it could take over two years to sell from beginning to end. So if this was the case, under this type of will, we wouldn't get the £175k free residence nil rate band. Without that my dad's estate would fall into the threshold for IHT.

"Her share is worth £250k and goes to myself and two brothers with my dad having a lifetime right to live in property. Everything else went to my Dad. So she effectively used her £175k allowance for main residence and £75k of her other allowance leaving £259k allowance to pass to my dad on his death"

You need to be careful with this, especially as I notice you mentioned more than one property. Did your mum have a share in that property as well?

The £175k allowance can only be set off against the net value of your mum's share of the main residence. So, as long as their house has a net value of at least £350k (assuming 50/50 ownership) then everything's fine.

But if it's less than that then you cannot use the entire £175k allowance.

Here's an example. The family home is worth £300k net and your mum owns 50%.

Her share of the family home is worth £150k. She also has other assets (eg share of another house) that are worth £100k to make £250k in total.

In this case you can only claim £150k allowance and the other £100k of assets use up £100k of her £325k threshold so leaving just £225k rather than £250k.

Yes the £175k was used against her main property (main residence share was £250k). Her share of the other ws only worth £80k and transferred my Dad as spouse so nil tax but will come under my Dad's estate on passing.

So basically we used her £175k main residence allowance and the remaining £75k came off her £325k allowance.