I have a client whose mother made a Lifetime Nil Rate Band Trust in 2005 with the Bank of Scotland. He told me that the purpose of it was to take the nil rate sum out of his mother’s estate but having read the document, the mother as settlor is included in the class of discretionary beneficiaries.
Doesn’t this create a gift with reservation of benefit? I can’t understand why she is expressly included if the purpose was to take this money out of her estate for IHT purposes.
Where a settlor is within the class of discretionary beneficiaries the gift into trust is a GWR. If the settlor’s spouse but not the settlor fell within the class of discretionary beneficiaries no GWR arises.
Malcolm Finney
I may be wrong here, but wouldn’t it be necessary that the spouse could only benefit if he/she was the settlor’s widower/widow?
Patrick MORONEY
Just to expand what I had in mind, as stated in IHTM14338, “whilst naming a spouse as a beneficiary does not create a GWR but as stated in 14339, if enjoyment of a gift by the spouse or civil partner is shared by the donor the GWR provisions will apply. As is mentioned at (IHTM14338), you may need to consider the associated operations provisions (IHTM14821) in this context.”
I would suggest that it is safer for the trust deed to ensure that the spouse can only benefit after the settlor’s death
Patrick MORONEY
The Settlor is the client and there is a section in the Trust Deed entitled Discretionary Class which includes the Settlor. It also goes on to say that the Settlor is the automatic default beneficiary in her lifetime. Surely that must mean that the amount in the trust will be treated as a GWR and be pulled into her estate for IHT?
Correct.
Malcolm Finney
I have just come across an identical policy and trust.
The trust was created before the introduction of transferable nil rate bands in 2007. The trust was not created to avoid IHT by placing anything outside of the estate, and the GWR rules were not of paramount importance.
Rather, the trust was created so that on the death of the settlor, the investment could be left to somebody other than the settlor’s spouse. This would allow the first of a couple to die to leave some assets to their children, and use at least part of their own Nil Rate Band.
This arrangement was unnecessary from 2007 and the introduction of the transferrable nil rate band.