Carla Brown looks at why discretionary trusts are still popular for safeguarding assets
Prior to the pre-Budget statement in October 2007, which saw the introduction of the transferable nil rate band for married couples or civil partners, discretionary trusts were common place for IHT planning in order to utilise the nil rate band.
Although, unsurprisingly, we have seen a decline in the use of discretionary trusts for this purpose since late 2007, we have, however, seen a significant increase in the use of discretionary trusts for asset protection purposes.
The nil rate band is now fixed at £325,000 until 2014/15 which means that using current figures, £650,000 could pass tax free between spouses. However, it is a popular misconception that the transfer of the nil rate band is automatic. In truth it requires a formal claim to HMRC within 24 months from the end of the month in which the second spouse or civil partner dies.
In order to make the claim, the executors or personal representatives of the estate need to first work out the percentage of the threshold that can be transferred. They then need to ensure they have supporting documents for the claim including a copy of the first will, grant of probate or death certificate and deed of variation if used. These are then sent with the necessary forms from HMRC to make the claim.
As mentioned, discretionary trusts are very beneficial in terms of asset protection, and probably the most common use is in relation to planning for long-term care.
With an ageing population, care home fees are a growing concern. With the average care home fees in the region of £25,000 to £30,000 (or more) per year, many people are forced to sell their home in order to pay for the fees. However, discretionary trusts can safeguard assets against assessment of a beneficiary’s means for care support by the state. Quite simply, should a client require local authority assistance to help fund care, the assets set aside in the discretionary trust would not be included in the financial assessment. This simple arrangement which costs a few hundred pounds could easily save tens of thousands of pounds.
Divorce and bankruptcy
Discretionary trusts can also ensure that a client’s assets are protected in the case of a divorce of a beneficiary, and the claims of a departing spouse or partner.
Latest figures from the Office of National Statistics show that 11.5 people per thousand divorced in 2008 which is just over 1 in 100. This may mean that divorce rates are at a 29-year low, but sadly the probability of a marriage ending in divorce is still one in three. Should the worst happen, many clients want to ensure that the money intended for their children or desired beneficiary is protected. Discretionary trusts can help with this. If funds are still retained within the discretionary trust at the time of the divorce, then while the existence of the trust would be taken into account in the divorce settlement, the Court could not say that those funds would definitely be available for that person and may, therefore, be somewhat protected.
A discretionary trust can also safeguard against the loss of assets in the case of the bankruptcy of a beneficiary. With insolvencies in England and Wales running at almost 35,000 then, like divorce the probability of a relative who you were planning on giving money to, having financial problems is quite high. A typical example is a client with feckless offspring, whose finances have traditionally been supported by the parents; they enter business and lose the lot. This may be OK for ‘pocket money’ but blowing the whole inheritance can be prevented by a discretionary trust.
Another common use is to protect an elderly friend or relative from ‘parasitic friends’. Sadly, as we become older we also become vulnerable and a significant minority of people are preyed upon deliberately, or they lose sight of the value of services provided by friends, neighbours or carers and can be persuaded to change their wills. Discretionary trusts can offer protection from fraud or persuasion. By changing a will later in life, whether by persuasion or through changes in circumstances, a discretionary trust can ensure that there is something left for the family or intended beneficiaries.
Lastly, but of vital importance, is the IHT planning benefits of discretionary trusts and their potential for future generations to save IHT. We find that this is one of the most attractive uses for clients and one that they embrace enthusiastically, as it offers the means to provide variable and flexible support for the people within the group of beneficiaries, given prescribed circumstances. As a discretionary trust can run for up to 125 years, it means that should the beneficiaries, often the children, accrue a significant estate in excess of the nil rate band, the money can skip them and pass down the generations for the benefit of their children or even grandchildren.
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