Frequently Asked Questions

This page is intended to provide a basic understanding of the principles and consequences of using Will trusts. It is intended to help Gray's Group customers understand their Wills, but it may not be relied upon as a legal authority and it should not be construed as advice.

Uses Of Trusts

Trusts are used in Wills primarily for:-

• reducing Inheritance Tax (IHT) liabilities by making maximum use of allowances
• ring-fencing assets to protect them for intended beneficiaries
• protecting the interests of disabled or incapacitated beneficiaries
• providing support for a dependent relative who lives with you.

Types of Trust

There are two types of trust used in Wills:

• Discretionary and
• Interest in Possession.

Discretionary trusts are used primarily for avoiding Inheritance Tax (IHT) and protecting the interests of disabled children.

In a Discretionary Trust, you set out a list of beneficiaries in your Will, but it is up to the trustees to decide which of those beneficiaries will actually benefit, when, and in what proportions, although you may give additional guidance in a separate letter of wishes.

Interest in Possession (IIP) trusts are used primarily for ring-fencing assets where there is no IHT threat.

With an IIP trust, you set out the rules defining who benefits, when, and in what proportions in the Will and the trustees have no discretion over it.

One beneficiary will have sole use of the trust assets until a certain time, often for their lifetime, after which the trust is divided among its ultimate beneficiaries as prescribed by the Will.

The Nil Rate Band

The NRB is your IHT allowance. For 2008-09 the NRB is £312,000, but it increases each year in line with prices inflation.

The first NRB's worth of your estate is subject to tax at 0%.

NRB Discretionary Trust

By using a NRB Discretionary Trust, the first NRB's worth of your estate goes into a discretionary trust free of IHT.

It is suitable for married couples (including civil partnerships) where both partners are British and where there is a need to reduce your liability to IHT.

The NRB Trust comes into force only on the death of the first spouse (i.e. first death).

Saving Tax

Assets transferred into the NRB trust escape IHT because the amount is limited to the amount of your tax-free allowance (i.e. the NRB value).

The value of the NRB trust does not subsequently form part of your spouse's estate on the second death, which means that they escape IHT on both first death and second death.

When your spouse dies (the second death) their estate will be valued and IHT will be charged on the amount by which that value exceeds the NRB applicable at that time (subject to certain allowances and reliefs).

As a couple, you have therefore been able to transfer one NRB's worth of assets out of your combined estates on first death and another on second death, without any liability to IHT. In todays terms, that is a total of £624,000 (2008-09) passed to your children free of IHT.

In the conventional Will, where one spouse leaves everything to the other on first death, the first NRB allowance is wasted because the whole joint estate will then be transferred to the beneficiaries (typically the children) in one go on second death, against which only one NRB can be offset.

Consequently, by including a NRB Discretionary Trust, you avoid IHT on an extra NRB's worth of estate, which is a saving in tax of 40% of the NRB, which amounts to £124,800 for 2008-09.

More Benefits

• Assets transferred into the NRB Trust do not belong to the surviving spouse after the first death, which means that they cannot usually be lost if your spouse remarries
• Also, such assets do not count as belonging to your spouse in the event of their needing Long Term Care, or in the event of financial difficulties
• Effectively, assets transferred into the Trust are ring-fenced for beneficiaries chosen by you, who are virtually guaranteed to inherit them when your spouse dies, irrespective of your spouses circumstances after your death.
• If you have young children, then it will be important to provide financial support for any guardians that may be caring for them. By including guardians as potential beneficiaries of the NRB trust you provide a mechanism whereby your trustees can use the assets of the NRB trust to support the guardians in whatever way is most appropriate at the time.

IOU Schemes

Traditionally, up to one NRBs worth of assets in your own name would form the NRB Discretionary Trust.

Your executors (who are normally also the trustees) would decide (usually in consultation with your spouse and wider family) which of your assets will be included, but in cases where your total assets amounted to less than the NRB then the whole of those assets would go into the trust.

However, there is now another option, which is colloquially known as an I.O.U. Scheme. This allows your executors the option to satisfy the trust by means of an IOU given by your surviving spouse, which may be secured by way of a legal charge on your assets.

This means that your actual assets can now pass freely to your spouse, who therefore has the use of them, while still maintaining the IHT and other benefits of the trust.

Assets in Excess of the NRB

Typically, assets in excess of the NRB pass absolutely to your spouse, free of IHT if both of you are British.

However, for even greater protection, the excess assets can go into a separate IIP trust for your spouses lifetime, passing to the ultimate beneficiaries (typically your children) on the second death.

That has no further IHT benefit, but is very effective in ring-fencing those assets to protect them against the other threats mentioned above.

IIP Trusts

IIP trusts are most typically used in connection with all or part of the house.

They bring no IHT benefit and are used to ring-fence a share of the house (or all of it) in case the surviving spouse remarries or requires some form of Long Term Care.

By leaving some or all of the house in an IIP trust on first death, it does not belong to your spouse, so the DSS, the Divorce Courts and various other threats cannot take it away from them. (See More Benefits above in relation to Discretionary Trusts)

IIP trusts can also be used to provide for dependent relatives. For example, if you have an elderly parent living with you, you might leave them a Life Interest in the house so that it is theirs to live in, but not to own. In that way you provide proper support for your dependent relative without any risk of the value of the house being diverted from your children or other beneficiaries.

Combining Trusts

For maximum asset-protection, you can use a NRB Discretionary trust and an IIP trust for assets in excess of your NRB (i.e. the Remainder or Residue of your estate).

Any assets that you leave in trust, either Discretionary or IIP, are ring-fenced for your intended beneficiaries, so by combining the NRB Discretionary trust with an IIP trust of the Residue you are able to ring-fence your whole estate as well as maximise your IHT savings.

Jointly Owned Assets

In order to take advantage of a trust, you must each have sufficient assets in your own name.

Any assets owned jointly with another person will pass automatically to that other person by survivorship and cannot be left in trust, irrespective of whether you are married or whether you had a Will or not.

Severance

Most relevant to Wills, if you own your home jointly it cannot be included in these trusts unless the joint ownership is first severed.

Severing the joint ownership creates what is known as a Tenancy in Common, which simply means that each of you now owns a defined proportion (usually half) of the house.

As Tenants in Common, the death of one owner does not automatically trigger the transfer of the whole house to the survivor. Instead, you may now transfer your share of the house into a trust in your Will.

Where one or both of you do not have assets in your sole name, ownership of assets can be rearranged in order to put some or all of them into each single name.

Titles to houses can be converted into Tenancies in Common and other assets can be split into single names if appropriate.

You are advised to take further advice before rearranging any existing assets in order to avoid penalties, taxes or other charges that may apply.

The Trustees

The surviving spouse will often be one of the trustees, but may not be the sole trustee.

The trustees have considerable influence and great care needs to be exercised when considering who they should be. The trustees can, for example, decide to call in the IOU, which may mean the survivor having to sell the home.

Gray's Group strongly recommends that you consider only your children or Gray's Group as additional trustees.

As a professional trustee, we have the knowledge and experience to advise your family appropriately and to ensure that the trust is conducted correctly.

Gray's Group charges for trustee services and you need to satisfy yourself that the benefits of using us are worth the extra cost. However, it is very difficult to estimate what professional services might cost in advance because it is impossible to know how much work might be required.

Most customers naturally prefer to use children or other family as additional trustees, but there are significant risks including the following:-

• Skills - it is sad, but true that your family and friends are unlikely to have the knowledge or experience to be able to act properly.
• Conflict of Interest - particularly with your own children, there is an inevitable conflict of interest when the trustees are also beneficiaries. This is especially pertinent with discretionary trusts where the trustees have real decision-making influence.
• Personality Clashes - you probably get on very well now, but the trust is likely to continue for many years and you cannot guarantee that you will always remain on good terms with your trustees, or they with each other.
• Survival your trustees - need to be around as long as the trust. With a firm you are much safer because even if one firm goes out of business the role of trustee would almost certainly be carried on by another firm.
• Privacy - many customers prefer to use independent, professional trustees simply to retain a degree of privacy. You dont necessarily want to share your most intimate financial information with your children or other family.

Click Here for more information about professional executorship and trusteeship services.

Moving House

While you are both alive there is no trust and you have normal control of your assets. You are therefore free to move house normally.

After the first death, control of the trust is shared between your surviving spouse and the additional trustees.

Your spouse may still enjoy the use of the trust assets, including moving house and buying a new home, but this must be with the consent and active participation of the trustees.

If you have used the IOU option, then your trustees may have secured that by means of a formal charge over the property, so even though you own it outright, you still have to get their consent before selling it.

The Risks

The most significant risk is the relationship your surviving spouse has with the additional trustees.

Your spouse does not control the Trust assets alone and the additional trustees will have significant influence. If your spouse falls out with those trustees there could be unpleasant consequences.

If professional trustees are appointed, then this risk is greatly reduced.

Tax rules change periodically and it is possible that the IHT benefit sought by this strategy is lost by some change of regulations that we cannot envisage now.

This has already been apparent with the introduction of the IOU schemes following a change of emphasis by the Inland Revenue in respect of its view on the traditional use of Nil Rate Band trusts.

For this reason, it is vital that you keep your Wills up to date.