What is a Nil Rate Band Discretionary Trust?
As a solicitor specialising in trusts and other areas of private client law, I am often asked about the various types of trusts, their uses, and in particular, the nil rate band discretionary trust.
Before changes to the law for deaths on or after 9 October 2007, this type of trust was frequently included in a person’s will as part of their inheritance tax planning. Many wills still contain this type of planning, and executors often find they need some help dealing with this.
Nil Rate Band (NRB)
The nil rate band is the amount that we have before our estates are subject to an inheritance tax charge of 40%. This means that the first £325,000 in an estate would be charged at 0% (NRB). The nil rate band of £325,000 is less any gifts or trusts made in the seven years before a person’s death and the legacies in the will.
Previously, an NRB could be wasted if the estate would otherwise pass entirely to the surviving spouse as the spouse would benefit from spousal exemption from inheritance tax in any case. Many earlier Wills include a nil rate band discretionary trust (NRBDT) which provides that the balance of the NRB is held in trust for one or more of the named beneficiaries.
Under current regulations, the nil rate band can be transferred between spouses giving a total of £650,000 (known as the transferable nil rate band (‘TNRB’) on the second death (subject to the factors above) and the older style planning of a NRBDT in a will to preserve the nil rate band may not be necessary.
How does a nil rate band discretionary trust work?
A nil rate band discretionary trust captures assets up to the value of the NRB in a trust. This allows the trustees to look at the needs of the beneficiaries and make distributions from the trust if appropriate. Guidance was often given through a memorandum of wishes prepared by the testator when making their will, but the trustees have the ultimate discretion.
This type of planning can now cause complications and could give rise to inheritance tax charges. Although in some cases the nil rate band discretionary trust may still be useful, the estate will need to be carefully structured in a way to avoid the pitfalls.
What options are there for trustees when dealing with nil rate band discretionary trusts?
If you are dealing with an estate with a nil rate band discretionary trust, this could be a good opportunity to consider estate planning. You will want to take stock of the situation and assets in the estate and identify who could benefit from the trust.
Depending on the specific wording of the trust, it may be possible to keep the trust, or the trustees could appoint out some or, all, of the assets to one or more of the named beneficiaries. You may even have the opportunity to look at investing the assets into another type of trust.
Two-year window
If you decide to wind up the trust and appoint out the entire trust fund within two years of the date of death, the change may then be ‘read back’ to have been made by the deceased in their will.
This in turn can benefit from retrospective effects in relation to both inheritance tax and capital gains tax.
Next steps
This is a complex area of the law and any decisions you make could have tax consequences. Therefore, professional legal advice should be obtained before dealing with a nil rate band discretionary trust or making any changes to what you or a family member has in place.
GA Solicitors in Plymouth has a specialist wills, tax, trust and probate team which can offer effective legal advice to protect you and your assets. Ranked Band One in Chambers High Net Worth and also ranked in The Legal 500, you can be sure you are in the best possible hands.
Call the team today on 01752 203500 or email me directly via michelle.crump@GAsolicitors.com.
You can also read our recent article about when to set up trust funds here.
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