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The IOU Discretionary Will Trust

The IOU Discretionary Will Trust. The Just Wills IOU Discretionary Will Trust. What normally happens when a simple Will is in place? ‘Take advantage’ of free transfer of assets between spouses (‘Spouse Exemption’) @ 0% IHT. Estate worth £526,000. Spouse 1’s assets. Spouse 2.

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The IOU Discretionary Will Trust

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  1. The IOU Discretionary Will Trust

  2. The Just Wills IOU Discretionary Will Trust • What normally happens when a simple Will is in place? • ‘Take advantage’ of free transfer of assets between spouses (‘Spouse Exemption’) @ 0% IHT. Estate worth £526,000 Spouse 1’s assets Spouse 2 Tax-free transfer £263,000 (Spouse 1’s assets) passed to surviving Spouse on 1st death On 2nd death total Estate is worth £526,000 but is subject to only one nil rate band (£263,000) Resulting in an IHT tax bill of £105,200: £526k - £263k nrb = £263k @ 40% IHT = £105,200 in IHT

  3. The Just Wills IOU Discretionary Will Trust • Drawbacks of the free ‘interspousal’ transfers approach? • In doing this, only a single £263,000 personal IHT exemption (or nil rate band) will be used • Although first transfer is free of tax, the entire Estate (on second death) will only be able to be reduced by a single £263,000 nil rate band, rather than both (£526,000) • Meaning • More tax to pay • (Substantial) Tax bill to be covered by Executors before Estate is distributed • Less to pass on to children, family / friends / Charity

  4. The Just Wills IOU Discretionary Will Trust • What is a Discretionary Will Trust? • IHT mitigation (tax saving) vehicle • Allows a married couple to take advantage of both £263,000 IHT ‘nil rate bands’ • Suitable ‘liquid’ assets passed into Trust on first death • Surviving spouse is Trustee and potential Beneficiary • Controls and benefits from funds which are ‘loaned’ to them • Funds ‘borrowed’ from the Trust must be repaid to the Trust on their death • On second death surviving spouse can utilise their own £263,000 nrb and further reduce the value of the Estate

  5. The Just Wills IOU Discretionary Will Trust • How does it work? Estate worth £526,000 1st Death Funds loaned as required Spouse 2 £263,000 liquid assets 2nd Death DWT Loan repaid to Trust Balance of Estate (£263,000) attracts £0 IHT After 2nd death Trust funds may then be used for other named beneficiaries (children) Remainder of Estate has attracted £0 Tax and may be distributed normally to beneficiaries

  6. The Just Wills IOU Discretionary Will Trust • Discretionary Will Trust • Can save a great deal of Tax if used correctly (up to £105,200) • But fairly inflexible – although you might have suitable liquid assets at this stage, will you in 10 years time?

  7. The Just Wills IOU Discretionary Will Trust • What is an IOU Discretionary Will Trust? • Same principle a standard DWT • But permits greater choice and flexibility allowing the Trustees to accept a loan note (IOU) rather than liquid assets • Loan note can be based on the value of the house or other suitable assets • Enables the surviving spouse to avoid having to realise ‘physical’ funds to place into Trust • Not necessary to sell the family home whilst still benefiting from its value

  8. The Just Wills IOU Discretionary Will Trust • How does the IOU Trust work? Their portion of the value of the Estate passed to Spouse 2 via the Residue of the Estate in Will Estate worth £526,000 Loan note (IOU) passed into Trust by surviving Spouse based on value of house 1st Death Spouse 2 Will instructs that funds to value of the current NRB passed into DWT. Trust accepts IOU in lieu of liquid assets. 2nd Death DWT IOU is ‘called in’ and Loan repaid to Trust Balance of Estate (£263,000) attracts £0 IHT After 2nd death Trust funds may then be used for other named beneficiaries (children) Remainder of Estate has attracted £0 Tax and may be distributed normally to beneficiaries

  9. The Just Wills IOU Discretionary Will Trust • What are the benefits? • Tax savings of up to £105,200 • Flexibility • Variety of assets that qualify • More tax saving options when the time comes for the Trust to be established • Saves having to realise ‘cash’ to place into the Trust via selling the house • Although you may have substantial assets available now, will this be the case in the future?

  10. The Just Wills IOU Discretionary Will Trust • IOU DWT Costs • Initial purchase £565 + VAT • Trust establishment on 1st death £500 + VAT • Annual Trustees meeting (twice yearly to satisfy CTO) £250 + VAT (per meeting + disbursements)

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