A deceased client (2018) had under the terms of his will that a discretionary trust be set up with his surviving spouse and their adult children as beneficiaries. Per his letter of wishes, his estate was to be held in the discretionary trust for the beneficiaries.
The Trustees of the discretionary trust is the surviving spouse and a close friend.
None of the beneficiaries were made aware of the tax consequences regarding a discretionary trust and want the will to be altered to leave the deceased’s estate to the surviving spouse instead. Is this possible under IHTA 1984, s 144? I am a tax advisor and not a solicitor and would appreciate any advice. I will of course obtain legal advice however it would help my own understanding on whether the beneficiaries wishes are achievable.
Hogg and Thorburn Chartered Accountants
Yes, provided that the surviving spouse was one of the trustees named in the will (otherwise the prohibition against self-dealing might apply).
However, HMRC may well raise questions, to find out if there might be any agreement between the beneficiaries - for the other beneficiaries of the discretionary trust to receive gifts or other benefits from the surviving spouse. If there is any such suggestion, HMRC could refuse to allow relief under s. 144 IHTA 1984.
It will depend on the terms of the trust, however, assuming it is in relatively ‘standard’ terms it will be possible for the trustees to pay / transfer / appoint the assets to the surviving spouse. If this is done within two years it should enable the estate to benefit from spouse exemption. Sometimes trustees might be nervous about benefitting one beneficiary at the expense of all the others, but in a case like this there ought not to be a particular problem.
As an alternative, it may be possible for the trustees to exercise their overriding powers to vary the terms of the trust so it becomes a life interest trust for the surviving spouse, which will also allow spouse exemption to be obtained.
Clarke Willmott LLP