Trust period amended to reduce inheritance tax burden

Discretionary trusts are a great way to reduce the burden of inheritance tax but they must be drawn up properly to be effective.

A recent case before the High Court shows how problems can arise if the trust is not prepared correctly.

The case involved a man who made a will in which he wanted to leave as much of his estate as he could to his wife and his children without incurring inheritance tax.

With this in mind he created a discretionary trust fund to absorb some of his assets so as to keep the rest of his estate within the nil rate band for inheritance tax purposes. This was intended to reduce the inheritance tax implications by £86,000.

It was his explicit intention that the discretionary trust would not fall within his wife’s estate when she died.

He appointed trustees who wrote to his wife explaining that the effect of the arrangement was that the funds in the trust would be retained by the trustees on her husband’s death. The purpose of doing this was to reduce the inheritance burden on her estate when she died.

She and her husband signed a deed of variation to their wills to bring this into effect.

Years later when both the husband and wife had died, their son noticed an error in the deed. The discretionary trust period had been defined as enduring for only two years from the date of the husband’s death and not for the whole of the wife’s lifetime.

This would have the effect of bringing the funds sheltered in the trust back into his wife’s estate and so therefore liable for inheritance tax.

The trustee who had helped draft the deed could not recall why such an error had occurred but confirmed that it had been the intention of both the husband and wife that the trust should endure throughout her lifetime.

The trustees had to apply to the High Court to have the error corrected to ensure the trust remained in place.

The family were fortunate in this case that the courts were able to come to their rescue. This is not always possible as the rules are quite strict.

It is, of course, far better to ensure that trusts are set up correctly in the first place by experts and carefully designed to meet all your requirements.

Please contact Nic Pestell or Josie Birnie if you would like more information about setting up or amending trusts.