Welcome to the Wansbroughs Private Client - Wills, Tax, Trusts and Probate email update for January 2012. Should you create a discretionary trust in your will? A discretionary trust is a flexible structure which gives your chosen trustees the power to decide how to use the trust's assets to benefit a range of potential beneficiaries. A discretionary trust might be created to hold a specific asset or sum of money. Alternatively you may wish to leave your whole estate to a discretionary trust to enable your trustees to decide how best to deal with your assets taking into account the circumstances that exist at that time. These arrangements may be ideal for those worried about protecting and providing for loved ones. They could also offer the possibility of achieving substantial long term savings in inheritance tax. The family farm or business Discretionary trusts are often used to receive and protect assets which may qualify for Agricultural Property Relief ("APR") or Business Property Relief ("BPR") from inheritance tax. This may avoid this property passing to a surviving spouse in whose hands the relief may be lost for a variety of reasons. To take an example, let's say Mr Green owns a farm worth £2 million. He is an active farmer and the whole of the farm's value qualifies for APR. On his death he leaves everything to his wife who then sells the farm. She now holds the £2 million proceeds of sale in cash which no longer qualifies for relief. This cash will then be subject to inheritance tax at 40% on her death (after deduction of their nil rate tax bands if available). This will mean that her estate will pay additional inheritance tax of up to £800,000 on the proceeds of sale of the farm. If, however, Mr Green were to leave his farm upon the terms of a discretionary trust, he can try to ensure that the APR available was not wasted. The farm could be kept within the trust or sold by the trustees. Even if APR relief was lost the trust would still only be subject to inheritance tax at a much reduced rate of only 6% every ten years on the value of the trust's assets in so far as they exceed the trust's nil rate band. The inheritance tax savings in these circumstances could amount to many thousands of pounds. To take this example further and to illustrate the flexibility of these arrangements, if Mrs Green were to require access to these funds the trustees could simply loan them to Mrs Green. The loan will be a liability of Mrs Green's estate and so this cash will not be subject to inheritance tax on her death. The above are merely examples to illustrate the flexibility and potential benefits available. Competent advice and careful drafting are essential throughout. Testing the waters In recent years the Revenue have been increasingly strict in their interpretation of the rules governing the availability of APR and BPR. Specific gifts of these assets to a discretionary trust can be a useful way to 'test' whether these reliefs will be available. The Revenue will be required to consider the claim for relief but, if relief is denied, the trustees can distribute these assets to the surviving spouse within two years to avoid having to pay the additional inheritance tax. Further steps can then be considered during the lifetime of the surviving spouse to mitigate the final inheritance tax charge. A perfect fit Discretionary trusts are usually accompanied by a 'letter of wishes' from the person creating the trust in order to give their chosen trustees a clear understanding of their intentions and explain how they hope the trust will operate. These wishes can be altered as often as you wish without necessarily having to change your Will. Such wishes act as guidance for the trustees and are not legally binding. This provides the trustees with the opportunity of taking into account family circumstances at the time of death. For example, a disabled child may have greater needs than other children and so it might be appropriate to allow your trustees to decide what level of provision is necessary from time to time. Similarly, the trust could be used to protect a vulnerable or spend thrift beneficiary from financial abuse or from themselves. The trustees can use their powers to ensure that such a beneficiary is adequately provided for without necessarily allowing direct access to large sums of money. It is essential to seek expert advice if you are thinking about making a Will incorporating a discretionary trust. Please contact us for more information. | 
