Tax Planning Beyond the Grave! Two-Year Will Trusts

Malcolm Finney outlines a trust arrangement which can offer time to re-think and re-plan the deceased’s estate.

Making a will can sometimes be a little tricky. Many wills are made often years before death occurs and can, as a consequence, be out-of-date by then.

No-one can foresee what life will be like after death, and the more flexibility that can be built into a will the better.

It may be that the inheritance tax (IHT) treatment of a particular item may not be known until many months after death (e.g. whether property will qualify for ‘business property relief’). 

So is it possible to somehow, within one’s will, try and take account of the future as best as one can, and at the same time protect against an IHT charge?

The answer is that the ‘two-year will trust’ goes some way to achieving both goals.

A will trust is simply a trust which is set up by will, as opposed to in lifetime. The will identifies the property which is to be placed in the trust, and for whose benefit.

Herbert Brown decided to put his three buy-to-let properties in a discretionary trust under his will for the benefit of his four children.

 

The idea is that the rental income can be split amongst the three children depending upon their financial status at the time, and in due course the properties could be appointed out to them.

Strictly speaking, the two-year will trust does not need to be set up just for two years, but can be set up for longer. This was the case in Example 1, where the trust will last as long as the trustees allow it to continue.

The key to the two-year will trust is that there may be IHT advantages which disappear after the two-year period.

A discretionary trust is a trust under which no beneficiary has any rights to the trust property or trust income, and only the trustees under their discretion determine which beneficiary takes what and when.

Helen Black under her will left her shares in XYZ Plc on discretionary trust for her two children, three grandchildren and her brother.

The trustees are able to decide who, if any of them, gets any of the dividends which the trust receives on the shares, or who might get some of the shares.

By setting up such a discretionary trust, Helen is able to leave it to her trustees to decide who shall benefit from the XYZ Plc shares after her death and in the future but, more importantly, the trustees in exercising their discretion are able to take into account factors not known to Helen at the date of her death. Thus if, say, one of Helen’s brothers eventually had to go into a home, perhaps the trustees could help fund some of the costs; or if, say, one of the grandchildren went to university, perhaps the trustees could from time to time advance some monies to the grandchild.

The possible IHT advantages referred to above arise where, within two years of death, the trustees distribute the trust property amongst its beneficiaries because in so doing it is the testator (i.e. the person making the will) who is regarded as making the distributions for IHT purposes, not the trustees.

Brian White left his business property on discretionary trust for his wife and two children.

Twelve months after his death, it becomes clear that the property does not qualify for BPR, in which case a substantial IHT liability arises thereon.

The trustees therefore decide to appoint the property out to Brian’s wife within the two-year period.

The effect is that for IHT purposes Brian (not the trustees) is regarded as having left the property directly to his wife. This would be an inter-spouse transfer and no IHT is precipitated (even though in fact it was the trustees who made the distribution).

Leave a letter with your will addressed to the trustees of the will trust, providing them with some guidance as to how you would like them to exercise their discretion amongst the beneficiaries.