We have inherited a discretionary will trust the value of which exceeds the NRB and which is therefore liable to IHT, albeit at a relatively low rate. The potential beneficiaries include the deceased’s disabled son, his spouse and issue, and charities. It is very unlikely that there will ever be a spouse or issue due to the son’s age and disabilities, so it is likely that the residual fund will pass on his death to charity, and it seems a shame to be paying any IHT in these circumstances.
I am therefore considering whether we should convert the discretionary trust to a disabled persons trust. I assume this is possible although I have found no precedents or discussion in text-books. I am aware that it would trigger an IHT exit charge, but feel this may be worth paying to avoid further IHT in the future. CGT is not an issue as the trust fund is in cash and an investment bond.
However, the lack of precedents or discussion makes me wonder if I am missing something, so if anyone on the forum can think of another reason why we cannot or should not do this I would be very glad to hear from them. Likewise, it would be good to hear from anyone else who has done it and/or agrees that it seems like a reasonable plan in the circumstances.
I have just done this very thing, after a lot of head scratching and weighing up the various issues. I converted a discretionary will trust to a s89 IHTA 1984 trust using a deed of appointment. I couldn’t find a precedent that did this exactly, so I used two of three of the precedents in Practical Trust Precedents as my starting point.
One of the drivers in my case was the desire to claim RNRB which was not available if the trust remained within the relevant property regime. I am about to file my deed of appointment with the CTO to claim back some IHT. I will try to remember to come back and update this thread when I hear back from them.
Rachel/Diana, have you considered the wording of IHTA84 s.89(4) which I think, in order to secure the desired IHT treatment, would require the son (in Diana’s case) to have been disabled at the point that the Will Trust was established?
Hi Paul… yes, I did consider it and in my case the beneficiary was disabled at the date of death (it was a will trust).
Your post reminds me to update the thread more generally. HMRC have now considered the deed of appointment creating a disabled person’s interest and (after many months) refunded the inheritance tax on the basis that the RNRB now applies to the trust.
I believe that Diana’s “conversion” is not occurring within 2-years of the testator’s demise, so, assuming that the provisions of IHTA84 s.89(4) are satisfied, the property will change character from relevant property to non-relevant property and thus an exit charge will arise (as Diana indicates). However, whilst she says that CGT is not an issue, I believe that a s.260 holdover would be available if needed.
Is the beneficiary on means tested benefits though? If he is surely you have to go with a DT rather than the disabled persons trust.
Would another option not have been to appoint a charity /charities as further discretionary object(s) and then appoint out an amount of capital to them thus bringing the remaining capital balance under £325k?
Even though the conversion will create a QIIP under s.89 (hence the exit charge), the appointment doesn’t need to create an actual IIP - i.e. the trustees can still accumulate income, the stipulation being that if they decide to distribute that income, it would have to be paid to the VP (barring the de minimus amount allowed in statute), so I don’t see that any means-tested benefits would necessarily be affected.