A married couple with children will often wish the residue of their respective estates to pass to the survivor. The survivor will generally inherit outright or benefit from the estate through a trust which will continue for their lifetime. Both options are tax efficient as assets passing between spouses are exempt from IHT. On the death of the surviving spouse (or a single person with or without children) Inheritance Tax (IHT) will be payable at the rate of 40% on the value of the residuary estate over £325,000 (or for a married couple £650,000, if a full transferable Nil Rate Band from IHT is available).
Many parents with children who have reached adulthood, and who may well have children of their own, will be happy for them to inherit outright. However, those assets will then form part of the children’s estates outright and will potentially be subject to IHT at 40% on death. The assets will also be vulnerable to third parties other than HM Revenue & Customs, such as on divorce or bankruptcy. Without the use of a trust structure there is no control over the devolution of the assets flexibly between generations to avoid such problems.
In contrast, a Family Will Trust can exist for up to 125 years or be brought to an end at any point before then, as the trustees decide. The trustees have complete discretion as to how the trust is administered and how funds are applied for the beneficiaries. They will be guided by a Letter of Wishes setting out the wishes of the person establishing the trust. Including a Family Will Trust provides the greatest flexibility to adapt to circumstances at the testator’s death and beyond.
A Family Will Trust offers the benefit of asset protection from a divorcing spouse or from creditors on bankruptcy. The assets in trust do not form part of a beneficiary’s estate. The trustees can still make funds available for use by the beneficiaries. For example, interest-free loans can assist with property purchases.
Income generated by the trust assets can be directed to provide income for those beneficiaries who need it. This also offers a tax saving if those beneficiaries have unused Income Tax allowances.
A Family Will Trust can also mitigate the effect of IHT in future. If, instead of passing assets directly to children, Family Will Trust is established for the benefit of children, grandchildren and even future generations, the trust will be subject to IHT every 10 years at a maximum rate of 6% of the value over the NRB or on outright distributions from the trust. At current rates it will therefore be 70 years before the family pays IHT at the rate of 42% (i.e. 6% multiplied by 7 decades) and exceeds the rate of 40% which would apply on the death of a beneficiary who inherits outright. Children inheriting at 50 years of age, for example, will certainly die within 70 years of their parents and so using a fFamily Will Trust offers IHT savings. It is also possible that grandchildren who have inherited from their parents will die within that period. Family assets would then be twice subject to IHT.