Don't be too trusting with your legacy plans.
CAN you put your trust in trusts when it comes to inheritance tax planning? For the most part the answer would be in the affirmative but complications have come to light in some cases and these need to be addressed.
The concerns have arisen in the wake of the phased introduction of a significant extra IHT concession first announced in 2017.
An existing nil rate band (NRB) of PS325,000 was topped up by a residence nil rate band (RNRB) designed to allow direct descendants to inherit the 'family home'.
A direct descendant generally refers to a child, grandchild or other lineal offspring including step, adopted and foster children. Nephews, nieces, siblings and other relatives are not included.
Estates valued at more than PS2 million will see the RNRB gradually withdrawn or tapered away.
So, for the tax year 2019/20, the allowance is PS150,000 (meaning a total individual allowance of PS475,000) and it will rise by PS25,000 in 2020/21 when it reaches PS175,000 (meaning a total allowance of PS500,000).
In 2019/20 therefore the maximum that can be passed on tax-free is PS950,000 for married couples or those in a civil partnership, PS475,000 for singles.
For couples, when the first one dies their allowance is passed to the survivor, so that PS475,000 is doubled to PS950,000.
The potential complications arise if, as a result of inheritance tax planning or in connection with long term care fees, a person's home has been placed in a trust or is subject to a trust within their will.
A trust is an arrangement whereby an individual called the settlor, passes assets to individuals called trustees to look after for their beneficiaries - usually their children and grandchildren.
There are many different types of trust but the most common are: A Bare trust is where there is a beneficiary chosen at the outset who cannot be changed and is entitled to all of the capital and income from the trust fund once they reach 18. These are commonly used for minor children.
With Interest in Possession trusts the trustee must pass on all trust income to the beneficiary as it arises (less any expenses). So, for example, the terms of the trust might say that when you die, the income goes to your wife for the rest of her life. When she dies, the capital will pass to your children.
In the case of discretionary trusts, trustees can make certain decisions about how to use the trust income, and sometimes the capital.
Depending on the trust deed, trustees can dictate what gets paid out (income or capital), which beneficiary to make payments to, how often payments are made, and any conditions to impose on the beneficiaries.
Discretionary trusts are sometimes set up to put assets aside for a future need, like a grandchild who may be deserving of more financial help than other beneficiaries at some point in their life, or beneficiaries who are not capable or responsible enough to deal with money themselves.
There should be no RNRB issues over Bare trusts or Interest in Possession trusts.
But, if the home is left to a discretionary trust, even if the beneficiaries are direct descendants and they end up with the property, the deceased's estate will not qualify for the RNRB.
If it is a discretionary trust which you have set up, or you are aware a trust exists but have forgotten its exact nature, then get in contact with your adviser and ask them to research the position.
Otherwise, down the line, your beneficiaries could be in for a costly surprise, a 40 per cent tax bill.
Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: email@example.com The views expressed in this article should not be construed as financial advice
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|Publication:||The Birmingham Post (England)|
|Date:||Jun 13, 2019|
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