I am preparing Wills for spouses. They wish for the estate of the first to die to pass into a life interest trust with powers to advance capital to the life tenant. On the death of the life tenant the trust is to be held on a discretionary trust. The intention is for charities to benefit on the second death but not immediately. There is a wait and see approach should any claims arise but the plan will be for the trust to be paid to charities within two years of the life tenant’s death a together with the estate of the survivor which will pass to a discretionary trust. Having thought about this further, I am unclear that charity exemption will be available against what passes from the trust to the charities on the life tenant’s death. Whilst I am clear that s144 will apply to distributions from the survivor’s estate, am I right in thinking that this will not be available against what passes from the DT to the charities after the death of the life tenant?
Yes, I believe you are correct. If the surviving spouse dies, the value of the life interest trust at their death is aggregated with their free estate and subject to IHT. There is no reading back under s144 as there is a prior life interest, so if distributions are made after the surviving spouse’s death, they do not change the IHT position at the surviving spouse’s death.
However, this would only be an issue if both spouses die together, or if assets are not distributed to charity after first death (whilst the survivor is still alive). If gifts are made to charity from the life interest, these will be treated as made by the surviving spouse and exempt from IHT, reducing the value of the life interest at the time of second death.
You are correct in your assessment. While the charity exemption (s144) can apply to distributions from the survivor’s estate, it typically does not apply to distributions from a discretionary trust to charities after the death of the life tenant. To ensure that your intended charitable beneficiaries benefit from the estate, it’s important to structure the trust and estate plan in consultation with a qualified legal or financial advisor who specializes in estate planning and charitable giving to maximize the charitable exemption and minimize potential tax liabilities.