WHY USE A DISCRETIONARY TRUST RATHER THAN JUST TRANSFER THE ALLOWANCE?

For many married couples or civil partners, the new transferable allowance offers a simple and easy way out of the IHT trap. Using 2009 - 2010 allowances, up to £650,000 can now pass to the children free of IHT without having to plan ahead. More importantly, those widows and widowers who made no preparation or planning will be able to use the double allowance when they die.

So why have a Discretionary Trust in your will if the IHT savings can be had without the effort?

THE ADDITIONAL BENEFITS A DISCRETIONARY WILL TRUST OFFERS OVER A TRANSFER OF ALLOWANCE

1. The sums passed on in trust can be free of IHT for up to 80 years. If your children do well and face an IHT bill as a result, the money you left them in trust can be exempt. This could save your grandchildren £130,000.
2. Income Tax on interest generated by a trust may be claimed back by the beneficiaries. If you do leave the first £325,000 in trust for your family. they can enjoy tax free income if they are non tax payers; while they are at school, students or on a gap year for example. Grandchildren can also use their tax allowances against trust income. If interest is 5% pa, over 10 years that’s £175,000. Income tax paid by higher rate tax payers would be £70,000 on that income. But if the tax is re-claimed, the family is £70,000 better off.
3. If you or your partner need long term care after one of you has died, up to half the value of your home and savings up to £300,000 can be sheltered from the Local Authority seeking refund of costs.

NONE OF THE ABOVE BENEFITS APPLY IF YOU SIMPLY USE THE NEW TRANSFERRABLE ALLOWANCE

IMPORTANT. One advantage the new transferable allowance provides is that on second death it’s worth twice the current allowance. If you have a will trust, to ensure it also provides twice the current allowance, you should ensure you have a clause in your will allowing your trustees to index the first bequest into trust by the housing price index.

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