Conversion of discretionary trust to disabled persons trust

Trusts Discussion
1

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.

Diana Smart
Gordons LLP

2

Hello Diana,

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.

Best wishes,

3

Thank you, Rachel, that is much appreciated.