Prior to the introduction of the transferrable inheritance tax allowance (known as the nil rate band) in October 2007, it was common for married couples to set up Nil Rate Band Discretionary Trust (NRBDT) wills as a tool to mitigate the inheritance tax liability on the second death.
Prior to October 2007, if a married couple left everything to one another there would be no inheritance tax to pay on the first death. However, on the second death there would only be one nil rate band (currently worth £325,000) available to offset against the value of the estate chargeable to inheritance tax.
On the first death NRBDT wills transfer assets up to the value of the available nil rate band to a discretionary trust. The assets transferred to the discretionary trust do not form part of the estate on the second death. Therefore, the value of the estate chargeable to inheritance tax on the second death is reduced.
However, since October 2007 when married couple leave everything to one another on the first death, the nil rate band that was unused on the first death can be used on the second death. This has the effect of doubling the inheritance tax allowance available on the second death from £325,000 to £650,000. Therefore, these changes mean that NRBDT Wills are no longer required as an inheritance tax planning tool.
Options available for dealing with a NRBDT Will
Although the transferable nil rate band was introduced many years ago, we often deal with estates where the deceased made a NRBDT will prior to 2007 and did not change it prior to their death.
It is important that the executors of a NRBDT will properly administer the trust on the first death. Failure to act will lead to difficulties upon the second death.
There are the following options available in dealing with the NRBDT;
- Wind up the trust by appointing all the assets passing into the NRBDT to the surviving spouse;
- Appoint out some or all the assets passing into the NRBDT to other family members;
- Keep the NRBDT in existence by transferring assets from the deceased’s estate into the trust;
- Keep the NRBDT in existence by use or a debt arrangement or charge scheme;
NRBDT wills are complex and the best option to take will depend on several different factors, such as the financial position of the surviving spouse and the health of the surviving spouse.
What do to do if you are the executor of a NRBDT Will
NRBDT’s cannot be ignored. It is extremely important that the executors of a NRBDT will take specialist advice. It is important that the executors understand the options available and the administrative steps required to deal with the trust.
For tax reasons, it is important that the Executors make a decision within 2 years of the first death.
If you are the executor of a NRBDT will, please contact one of our Wills & Probate lawyers Team and we will guide you along the right legal path.