Inheritance Tax law changed dramatically in 2007. Prior to this date, whilst there was no Inheritance Tax between married couples, each individual had their own Inheritance Tax allowance and this was not transferrable between the two of them. Therefore if on the first death a spouse left their estate to the survivor and the survivor’s estate was worth over the inheritance tax allowance available to them when they died, there could be Inheritance Tax to pay on the second death. This seemed rather unfair given that if instead on the first death the spouse left their estate elsewhere up the value of the allowance and then on the second death the surviving spouse’s estate was worth below the allowance, there was no Inheritance Tax to pay. Most spouses, however, wanted to provide for the survivor.
A solution to this was to use a Trust on the first death. The Trust could be validly created and constituted. By using specific mechanisms then the assets in the Trust could effectively be loaned to the surviving spouse. When the surviving spouse died that loan was repaid to the Trust, ensuring that the surviving spouse had less assets in their estate. This clever mechanism meant that spouses could make use of their two allowances and the survivor still have the benefit of the assets. Therefore for any clients who were worth over the basic Inheritance Tax threshold this was sound Inheritance Tax planning.
As mentioned above the law changed in 2007, meaning that from an Inheritance Tax point of view the above planning was no longer necessary. The law was changed to say that the two allowances were available between the two spouses and could both be utilised on the second death.
However, what many individuals don’t realise is that they still have the Trust structure contained in their Wills. This is not necessarily a bad thing as the Trust does have advantages, which includes protecting the clients from a change in the law to revert to the previous Inheritance Tax rules and protecting assets from the surviving spouse and wider members of the family, and even Care Home fees. These Trusts can be a useful mechanism to have when planning your estate.
Sadly in my experience, it is all too common for the surviving spouse to presume they had inherited the entire estate and do nothing in relation to the Trust. This can store up tax and administrative problems in the future. If the Executors and Trustees take advice in relation to the Trust within two years of the death, they can decide whether they wish to formally constitute the Trust or indeed collapse the Trust and treat it for tax purposes as if it never existed. This is an important decision for the Executors and Trustees to take, bearing in mind the family circumstances at that time. However, it is becoming quite a common occurrence that no action is taken in relation to these Trusts, which makes dealing with them some years later much more difficult.
You can take action now to ensure this doesn’t become a problem in the future, either by reviewing your current Wills to see if you have this structure in them and if it is still the right structure for you as a family, or if you have been widowed checking the terms of your spouse’s Will to ensure that this could not cause you or your Executors difficulties in the future. Taking action now will be a better solution than creating tax problems for you or your Executors in the future.
For advice please contact Deborah Beal on 0345 20 73 72 8 or firstname.lastname@example.org