Still a need for Discretionary Trusts.

It has been a year since Alistair Darling announced one of the most significant changes to the rules for Inheritance Tax for many years. At the time of its introduction, a transferable Nil Rate Allowance (NRA) was hailed by many as a substitution for a tax efficient Will, but 12 months on, it looks like this prediction was rather premature.

Before October 2007, if both parties of a marriage or civil partnership wanted to ensure they could use their full Nil Rate Allowance, they had to write their Wills in a specific way and often use a ‘Discretionary Trust’. Then the Chancellor announced that, in future, when a surviving spouse died, their executors would be able to claim two NRAs before their estate and assets were subject to Inheritance Tax.

Whilst this was not the ‘doubling’ of the NRA allowance, (as it was misleadingly described) it did mean that a couple could protect a joint estate worth up to £624,000. This seemed to negate the need for Discretionary Trusts.

In his announcement, Darling explained that if the first spouse of a couple had died before October 2007, all the executors of the second spouse had to prove was that when the first spouse died, their estate was above the nil rate allowance applicable at that time, that assets were left to the surviving spouse and consequently, the first person’s NRA was unused.

This has not been as easy as it sounds. There are an increasing number of cases where executors have been unable to properly establish the facts needed, so all of these are being refused any claim or entitlement.

So how can couples make sure that the maximum of their assets and estate are passed on to their chosen benefactors? In the case of the transferable NRA, a surviving spouse must have the original Will of the deceased and the necessary Probate papers to be guaranteed the required facts can be fully established.

However, it would appear this is where the Discretionary Trust has retained its value. Not only does it fully establish the correct use of NRA at first death and protect the surviving spouse as beneficiary of the Trust, but it is also a tax shelter with an 80 year life, offering protection over that time.

Discretionary Trusts can mitigate against future threats to wealth such as the need for long term care, divorce, bankruptcy, re-marriage and second families. It can also make savings above the two NRAs and achieve further IHT savings. In short, the Discretionary Trust is still proving a robust instrument to protect wealth a year after its predicted demise.