Family Trust - help!

I have been approached by an executor who needs assistance in the administration of his late wife’s estate. The estate itself is fairly simple (everything to husband), except that a ‘family trust’ document has emerged…

A few years ago the family home (and another property) was settled into a family trust by them both for the purposes of 'preventing sideways inheritance / mitigating IHT / protecting vulnerable beneficiaries / providing for instant inheritance / reducing probate fees / etc… ’ (you’ve heard it all before).

The settlors retained the right to the income and thus the GWROB rules kick in. Her half-value of the assets in the trust has now increased to above her nil rate band and it now appears that IHT could be due. Clearly ‘her’ trust assets will not enjoy the benefit of the spouse exemption(?).

Hopefully my learned STEP colleagues will tell me that I have missed some key point and that these sort of arrangements work because of x,y and z.

After all, if these sort of arrangements led to an unnecessary IHT liability then no-one would do them. Right?!

Any thoughts welcome…

Richard Whitaker
CP Law Solicitors

It all depends on the precise terms of the trust…

Initially at least you will need to get someone who understands different
types of trusts and their tax implications to look at a copy of the trust
deed. and any other documents that might possibly have been prepared to
advise on what type of trust [ discretionary or interest in possession ].

In my view whoever advised on setting up the trust [ remembering that only
solicitors can charge for preparing a trust deed ] should have fully
understood the taxation implications and provided guidance in writing.

Depending upon the terms of the trusts, when it was set up, and to what use
the other property has been put there could be a number of ramifications.

Unfortunately I’ve come across far too many situations where trusts have
been ‘sold’ to clients without any proper understanding/guidance being

Andrew M Mortimer

Thanks, Andrew M Mortimer - I certainly wish I understood different types of trusts and their tax implications.

Does anyone else have any experience of these sorts of legacy planning problems?

Richard Whitaker
CP Law Solicitors

It’s impossible to answer without sight of the documents but consider the following:

  1. Was the wife definitely a settlor of the trust holding the property? Could it have been sold to the trust in exchange for a loan note (in which case the loan note may have also been settled onto another trust) - A double trust scheme may well carry POAT and other issues but it may be possible to avoid the IHT.
  2. If the trust is pre-2006 and the couple had interests in possession (you mention they had a right to income), is there any chance that the widower has an absolute or reversionary life interest - this may at least avoid the IHT on this death under s.49D/ 49(1A)© / s.18
  3. If the trust is pre-2006 and she had a right to income then the charge would be under s.52 rather than the GROB provisions (this one doesn’t actually help at all!)
  4. The other possibility is that this was a failed Eversden type scheme - usually one spouse would establish the trust granting the other an interest in possession and then the trustees would revoke the life interest - the idea being that the GROB provisions did not apply. If they carried out stage 1 prior to FA 2004 (which changed the GROB rules to counter it), they may not have bothered with stage 2, or perhaps the deed for stage 2 has been lost.
  5. Failing all that, it is worthwhile trying to find out what the purpose of the trust actually was - there may be a claim against the advisers if the trust has triggered an unnecessary IHT liability to no advantage whatsoever (there may be a suggestion that it could have provided protection from care home fees but I suspect that would be weak at best).

Andrew Goodman
Osborne Clarke LLP

Thanks Andrew.

The wife was certainly a settlor.

The trust instrument is dated only last year so most of your helpful comments, unfortunately, do not apply. I’m familiar with many of the Eversden-type schemes and this bears no characteristics…

I fear that this is simply one of a number of wholly inappropriate family trust schemes which purport to ‘ease the burden of the probate process’. Interestingly the surviving spouse mentioned, as an aside, that they had done all this ‘to save inheritance tax’. Given that the trust assets have swelled beyond a double NRB it appears to have done the opposite!

Richard Whitaker
CP Law Solicitors

Richard did you ever resolve the issue? I have something similar on my desk.

Many thanks

Katherine Melkerts
Melkerts Solicitors

Unfortunately not - it was still hanging when I left the firm!

Richard Whitaker