How to expand the pie when settling a will dispute

When reviewing a will in a probate dispute, I am sometimes left wondering why a solicitor has advised a testator to gift his or her beneficial interest in the family home into a discretionary trust.

It also recently occurred to me that some Solicitors and Barristers (including practitioners who specialise in drafting wills and trusts), may be completely unaware of the potential to expand the pie when negotiating the settlement of a probate dispute, by re-structuring a testamentary gift of the family home made on professional advice into a discretionary trust, as a more tax-efficient IPDI, i.e. to increase the IHT tax shelter for the benefit of the estate.

This is a technical tax solution, and I set out below extracts from my article co-written with Stephanie Churchill CTA for Taxation about how the relief works: Tax_2017_Vol180_Issue4619_RNRB-final.pdf (carlislam.co.uk)

For DOV’s, see section 10.9 of Chapter 10 of my book, the ‘Contentious Probate Handbook’: Wildy & Sons Ltd — The World’s Legal Bookshop Search Results for isbn: ‘9781784460600’; and for planning using an IPDI, see pages 174-177 and 298 – 300 of by book ‘Tax-Efficient Wills Simplified’: Tax-Efficient Wills Simplified eBook : Islam, Carl: Amazon.co.uk: Kindle Store

‘The amount of the transferable RNRB is capped at an additional 100% of a surviving spouse’s available RNRB. However, more than one pre-deceased spouse’s RNRB can be transferred. As with the NRB, it is the unused percentage of the RNRB that is transferred, not the unused amount.

Be wary of the many pitfalls when trusts are used to own residential property (either during lifetime or on death). …

If a property is left into a discretionary trust … the RNRB will not be available even if all beneficiaries are lineal descendants. This is because the beneficiaries are not treated as the beneficial owners of the property. Therefore, it is important that lifetime trusts and wills are reviewed to ensure that any potential issues are identified. To avoid the trust being created, it might be possible to put in place a deed of variation within two years of death. On a practical note, there can be problems if the beneficiaries include future children and grandchildren because it is necessary for all parties to agree to a variation. Many discretionary trusts cater for unborn generations and it might be necessary to apply to the court to vary this type of arrangement. Another option is for the trustees to make an appointment of the residential property to lineal descendants under the provisions of s. 144 within two years of death. In this case, the appointment is read back to the date of death which should enable the RNRB to be claimed. However, if no action is taken, no RNRB will be available to the estate. …

Generally, an immediate post-death interest (IPDI) will be effective in providing access to the RNRB because the beneficiary is deemed to own the asset. However, sometimes an IPDI can be set up as a discretionary trust in the first instance. It may therefore be necessary to review its terms to ensure that the RNRB is available. To use the RNRB it will be necessary to transfer part or all of the residence to the life tenant.

As mentioned above, if the RNRB is not available because, for example, the residence is a discretionary trust asset, … the trustees can restore it by making an RNRB gift post-death under s 144 (which is read back to the time of death and so qualifies for the relief). As long as the trust is unwound within two years of death (in other words by the trustees appointing the trust assets to S absolutely) this will be treated for inheritance tax purposes as if the assets had simply been left by T to S outright. Alternatively, the trustees can confer an interest in possession on S within two years of T’s death, which will be treated for inheritance tax purposes as if the will had conferred an IPDI on S.’

For non-tax planning reasons re-structuring may not be appropriate. Before proposing and drafting a DOV, current tax advice should be taken from a CTA in addition to legal advice from a specialist trust law practitioner, as there are elephant traps for the unwary. So plan carefully!

I am co-writing an article with Stephanie Churchill CTA for publication by Taxation early next year entitled, ‘The use of trusts, DOV’s, and s.142 appointments in the tax-efficient settlement of a contentious probate dispute.’

Carl's Mediation Blog

by Carl Islam, LLM (Exon)(International Business Legal Studies), Diploma in Art Law (Institute of Art & Law) (London), Barrister & CMC Registered Mediator – Trust & Estate Disputes, Cultural Property & International Dispute Resolution

How to expand the pie when settling a will dispute