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We have Nil Rate Band Discretionary Trusts in our Wills – do we need to change them?
We often encounter this situation, especially when clients haven’t reviewed their Wills for a while.
Pre – 2007
Before October 2007, many people included Nil Rate Band Discretionary Trusts in their wills to ensure that both spouses in a married couple could use their inheritance tax nil rate band. If the nil rate band is not used when the first spouse dies, the surviving spouse loses it, reducing the value of their estate when they pass away. Most people leave their estates to their spouse, which qualifies for spouse exemption, but without including such a trust in the will, they often overlook the nil rate band.
Post – 2007
In October 2007, the law changed to introduce transferable nil rate bands for spouses and civil partners. This change allowed every surviving spouse to claim their deceased spouse’s unused nil rate band, eliminating the need for inheritance tax savings at the time of the first death. The transfer applies even if the first death occurred before the law changed in 2007.
Are there any benefits in keeping a Nil Rate Band Discretionary Trust in your Will?
Yes, there are some advantages:
1. Surviving spouse requires care
If, at the time of the first death, the surviving spouse has become unwell and requires care, the trust can protect some of the assets. The trust will retain up to £325k worth of assets, and therefore this will be disregarded by the local authority when assessing the surviving spouse’s financial position and how much they may be required to contribute.
2. Assets likely to increase in value
The estate may include an asset which, at the time of the first death, is likely to go up in value over the coming years; in this case, there is an advantage in having such a trust as it keeps the increase in the value outside of the surviving spouse’s estate.
3. Divorce or Bankruptcy of beneficiaries
If you anticipate a scenario where your beneficiaries may face bankruptcy or divorce, a Nil Rate Band Discretionary Trust protects the assets from financial risk in both cases by ring-fencing the funds. The same applies if you have a particularly vulnerable beneficiary who may struggle to manage large sums of money.
Are there any disadvantages?
One of the main disadvantages is the administrative inconvenience of such trusts. For example, the need to prepare annual accounts, and tax returns and deal with the management of trust assets. Nonetheless, the advantages usually far outweigh the disadvantages if there is a concern regarding the protection of your assets or a possible inheritance tax saving.
What happens if I die with the Nil Rate Band Discretionary Trusts still in my Will?
Given your circumstances, it may be best to wind up the trust upon the first death, allowing the assets to pass to the surviving spouse. You can wind it up within two years of death to ensure the transferable nil rate band is available for the surviving spouse when they pass away.
You can prepare a formal deed of appointment to handle this process. If the first spouse dies and no action is taken, the surviving spouse loses the opportunity to claim the deceased spouse’s nil rate band.
Therefore, it is crucial to regularly review your will to ensure it aligns with your current circumstances and the latest legislation, avoiding unnecessary administration and additional costs.
How can we help?
If you would like to discuss this further or if you have any questions relating to your Will or an estate, we have a specialist Wills & Estates team who would be very happy to assist. For more information, please contact us at online.enquiries@LA-law.com or call on 01202 702612.
