Another solution might be to incorporate a discretionary trust into one or both Wills. A discretionary trust usually has three trustees and names a number of potential beneficiaries, usually the surviving spouse and other relatives; whether children, siblings, parents or other.
The crucial point is that no particular beneficiary has a right to receive any particular part of the trust estate. The decision as to whom should benefit and to what extent must be made by the trustees. They however can be guided by a side document know as a “memo of wishes” by the testator.
The memo cannot fetter the discretion of the trustees, but will state in the testator’s own words what they want to happen to their estate on their death and what their wishes and objectives are. The trustees can make distributions to beneficiaries outright or on further trusts, including liferents.
A discretionary trust offers flexibility. The trust is treated as a separate entity for Inheritance Tax purposes and as such can pay further tax if the value of the assets or investments held in the trust exceed the level of the nil rate band. The maximum rate of tax however is 6%. If the assets held do not exceed the Nil rate band threshold (currently £325,000) then there will be no further charge to Inheritance Tax, although other taxes may apply e.g. income or capital gains.
The Will could state specifically that the trust should be set up for an amount not exceeding the nil rate band level. The trust in effect “uses up” the nil rate band of the first spouse so that it does not transfer to the second spouse. The second spouse however still has their own nil rate band of £325,000. Such a trust can include a share in the house as well as other investments.
As stated above, the trustees make the decisions about who benefits and to what extent. They could even make over the entire estate after first death to the surviving spouse if that is considered by them (guided by the “memo”) to be the best course of action.
Loans can be made from the trust to any one or more of the beneficiaries and the trustees can require an “IOU” in return. This means that if the loan has not been called up beforehand, on the death of the surviving spouse the amount of the IOU is repaid to the trustees of the first spouse to die, thereby reducing the value of the estate of the second spouse (because of the “debt”).
The sum repaid from the second estate back to the first therefore effectively secures or “ring fences” the estate going forward to the next generation. However, consideration needs to be given to funds remaining in the estate of the borrower and their ability to repay or give security.