Wills and Estate Planning

This guide provides information on the use of trusts in Wills as part of the estate planning process to deal with situations to mitigate against means tested care fees, trusts to protect against potentially profligate beneficiaries and pre-existing nil rate band discretionary trusts.

Many couples own their property jointly and it is usual that it is held as “joint tenants”. This is a legal term to reflect the fact that if one dies, the share of the deceased will automatically pass to the co-owner.

From an inheritance tax planning perspective, this is irrelevant because if a spouse or civil partner then owns the full value of the property on their death they are able to utilise the nil rate band of the first to effectively double the nil rate band prevailing at their death (on the assumption that the whole of the rest of the deceased’s estate passes to the survivor).

There are situations, however, where altering the title deeds so that the share of the first to dies does not automatically pass to the survivor may be useful. They would then hold the property as “tenants in common”. This is particularly the case in planning for possible means tested care home fees exposure and the use of a trust of a life interest trust in Wills is advantageous.

The life interest trust in a Will

As tenants in common a husband and wife own shares in their home so that it is owned jointly. As an example, if the husband is first to die, instead of leaving his share of the house (which can now be left under the terms of his Will) to his spouse, it instead passes into the hands of the executors (also acting as trustees) with the wife having a right to continue living in the property until her death. At that point the husband’s share (and the wife’s share under the terms of her Will) will pass to the children or other named beneficiaries.

This can ensure that the wife retains a right to live in the property and that the children will ultimately receive their father’s share. This can be particularly important for second marriage situations when children from a first marriage can be protected to ensure that they at least receive a half share in the property.

In addition, in a second marriage situation if the property is owned by one person and they want to ensure that their new spouse continues to have a roof over their head for the rest of their lives, a life interest trust can be created in this situation and at the same time ensuring that the children from the first marriage continue to inherit the property.

If there is a possibility of means tested care fees being an issue then because the survivor does not own the property outright, the share of the first to die on any assessment of capital for the purposes of care fees will be ignored as the survivor will only be treated as owning a half share in the property which could be an advantage.

Discretionary Trusts

When planning how to deal with your state particularly in relation to your Will you may want to consider the use of a discretionary trust. A discretionary trust is a flexible way of ensuring that a beneficiary or beneficiaries have the opportunity from benefiting from your estate, but under circumstances that you control in the Will.

You may be concerned about a beneficiary who has financial problems and may become bankrupt or who you may feel may be too spendthrift and you are worried that they will dissipate their inheritance too quickly. A potential beneficiary may be going through a divorce and you do not want your estate to pass to a former daughter-in-law or son-in-law for example.

Making a gift of assets to children but retaining them in a trust until they are, say, 21 or 25 means that you pass control to trustees who can ensure that at that age the children are able to handle an inheritance.

The advantage of a discretionary trust is that no other person named as a beneficiary is entitled to the trust property. It is up to the trustees to decide when and in what circumstances a beneficiary might receive anything from the trust and they could decide, for example, to secure a loan document as a security against assets or cash given to a beneficiary or alternatively by an asset directly for the person’s benefit.

Trustees will always want to have an indication as to how the person who has created the trust wants them to act and we always advise that guidance is given in a formal Letter of Wishes to the trustees expressing how their powers should be exercised.

Nil rate band discretionary trusts

Prior to October 2007 many married couples and civil partners were advised to make Wills which incorporated “nil rate band discretionary trust”. The intention behind these trusts was to ensure that the nil rate band attributable to each individual was fully utilised rather than being absorbed in the exemption that applies on gifts between spouses and civil partners.

For deaths after October 2007 spouses or civil partners are now able to gift the whole of their respective estates to each other without a charge to tax (as before) but on the death of the survivor the then prevailing nil rate band can be uplifted by 100%. The nil rate band is presently £325,000 and this means that on the second death the first £650,000 of a combined estate is free of tax. This is known as the “transferable nil rate band”.

If a percentage of a person’s Estate is left to their spouse and, for example the balance left to their children, it is the amount left to the spouse or civil partner that is relevant so, for example, if a husband leaves 70% of his Estate to his wife and 30% to their children, on the wife’s death her estate can be uplifted by 70%.

If you have Wills which contain nil rate band discretionary trusts you could either consider making new Wills removing those or alternatively leave them in place to enable the surviving spouse or civil partner to decide what to do at the time of the first death. It is possible to transfer the assets comprised in the nil rate band trust to the surviving spouse or civil partner to effectively collapse this and as long as this is within two years of the date of the first death and the remainder of the estate is also left to the survivor the nil rate band on the second death can be uplifted by 100%.

We can assist by advising you on:

• The steps required to “sever” a joint tenancy to convert it into a tenancy common for estate planning.
• The impact of means tested care fees on an estate.
• The steps required to incorporate discretionary trusts in your Will.
• Drafting appropriate documentation on the first death where a couple have Wills containing nil rate band discretionary trusts.