A recent talk given by Professor Lesley King raised a few options for dealing with Discretionary Trusts in Wills, i.e.
Keep the Trust in place but for simplicity and tax efficiency look at preparing a Deed to earmark the income for one particular beneficiary, usually the spouse.
Appoint all of the discretionary fund out of the Trust, usually to the surviving spouse via Deed of Appointment within a two-year period of death, thus getting rid of the discretionary trust.
She then said there was of course a third way - to appoint the discretionary fund out to a new IPDI settlement instead which of course would retain the asset protection element should the survivor need social care AND ensure the NRB can be transferred on death of survivor and RNRB can be claimed.
Professor King somewhat glossed over this third option but surely it is the best one? I would be very interested to hear what other practitioners do when dealing with this issue?
And just a second point about IPDIs - where a survivor is entitled to whole of first estate absolutely (no trust) but tries to vary to include an IPDI thinking this could minimise the impact of care fees, this would be seen as deprivation of capital.
I’m right in thinking there would be no deprivation if there was a deed of appointment out of a discretionary trust to a new IPDI would there? The assets have always remained in the trust, were never the surviving spouse’s assets and therefore no deprivation?
What you do will depend entirely on the circumstances and assets held so there can be no general best course.
As you say, asset protection will apply to an IPDI, although a discretionary trust would normally provide greater protection, but the TRNRB is lost. A flexible IPDI with overriding powers is often the best bet.
As a rule of thumb, IPDI is first choice as it does NOT suffer taxation under the relevant property regime.
Agree with Simon’s comments - dependent on circumstances.
Thank you Richard but did you mean to say that it does not suffer taxation under the relevant property regime?
Thank you Simon and I’m right in thinking aren’t I that a Deed of Appointment signed within two years of date of death appointing assets out of DT to an IPDI will not in anyway seen as deprivation of capital by spouse. I just want to be 100% sure before I proceed because it was a question my client asked me.
Obviously a spouse receiving absolutely under a Will who then varies within two years to set up an IPDI of which he/she is life tenant is clearly a deprivation. But the above action - deed of appointment - wouldn’t be because those assets pass from one trust to another so never form part of survivor’s estate.
Totally agree that it depends on the assets. Where the first to die has very little cash it often makes sense to just appoint that out to spouse absolutely and just keep the share of the property in the Trust.
Yes I always go with the fully flexible life interest trust.
Sorry yes - typing while drinking coffee - fatal error.
No deprivation as you say, unless she was the sole trustee! Unlikely.