McCormick & Nicholson - Solicitors

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McCormick & Nicholson - Trust and Executries - FAQs...

Trusts:

What is a Trust?

A trust is an obligation binding a person (a ‘trustee’) to deal with property in a particular way for the benefit of another person or class of persons (of which he himself may be a member). The trustees own and manage the trust property.  The beneficiaries have no rights to the property itself but can compel the trustees to perform their trust duties and claim damages from them should they fail to do this properly.

Why use a Trust?

A trust is a useful asset protection mechanism and can be used in a number of ways, the most common uses are:

  • as a tax planning tool or “shield";
  • to apply assets to look after family members who are too young to manage their own financial affairs or who are incapable of looking after themselves;
  • in family businesses whereby shares are often put in trust to keep the business stable in the event of a family member’s death.

Trusts can be either “inter vivos” which means created during the lifetime of the truster or “mortis causa” which means created in terms of a Will. The latter are sometimes referred to as “Will Trusts”.

What is the current Inheritance Tax Nil-Rate Band Threshold?

In October 2007, the individual inheritance tax (“IHT”) nil rate band rose to £300,000. It will further rise to £350,000 in 2010. At the same time, it was announced that the nil rate band would be transferable between spouses or civil partners (which is extended to all widows, widowers and bereaved civil partners). Therefore couples can now pass on assets of £600,000 without IHT becoming payable.

Are Nil-Rate Band Discretionary Trusts still useful?

The significance of Nil-Rate Band Discretionary Trusts has diminished in light of legislative changes but they are still a useful tax planning device. It is not necessary to change your Will if it provides for a Nil-Rate Band Discretionary Trust, there remain a number of good reasons for using them, such as:

  • Assets in the Discretionary Trust are ring-fenced from the effect of the surviving spouse’s bankruptcy;
  • The assets will not go to a future spouse if the survivor remarries but will go the beneficiaries that the deceased spouse wanted (most likely children or grandchildren of the marriage).
  • There may be other reasons to minimise the extent of the surviving spouse’s estate such as if the surviving spouse were to enter into means-tested residential care.

In any event, we recommend that you review your Will every five years and we can discuss the merits of abandoning the creation of a Nil-rate Band Discretionary Trust within your Will with you.

What are the tax implications of a Nil- Rate Band Discretionary Trust?

All income arising from the Trust is taxed at 40% and capital gains within the trust are also taxed at this rate. If you are a higher tax payer then the tax treatment is the same as your personal treatment but if you are not a higher tax payer then the treatment is significantly disadvantageous. There is also a 10 year charge tax. This is a periodical charge based on the capital value of the Trust on its tenth anniversary and each subsequent tenth anniversary. Currently, the 10 year charge is 6% of the value of the Trust’s assets at that time. 

Executries:

How long does it take to wind up an estate?

Each estate is different.  The time for administration varies according to the size and complexity of the estate.  The first issue is whether or not a Will has been left.  If there is no Will that inevitably adds at least two or three months to the process since it will require a petition for appointment of executor and then an application to obtain a Bond of Caution from an insurance company.  There are only two companies providing these bonds and an application can take two or three months to process.   A small or straightforward estate would normally be wound up in six months.  It is unlikely that the estate would be fully paid out in a shorter period of time since there is a six month period for claims to be lodged.  More complex estates inevitably take longer and estates with inheritance tax and other difficult issues may well take longer than a year to resolve. 

What is the process involved in winding up an Estate?

The extent of the Estate must be ascertained. We collect information from the deceased’s bank statements, share certificates, pension and investment companies etc and we then liaise with these various organisations in order to determine the deceased’s assets. We also contact the Local Authority, utility providers etc to ascertain the liabilities of the estate.  We then assess whether any Inheritance Tax is payable. Any IHT that is due must be paid in advance before Confirmation is granted by the Court. Yet funds cannot be ingathered from the deceased person's Estate until Confirmation has been granted. To solve this "chicken and egg" situation, an IHT overdraft facility is usually arranged on behalf of the Executors. Where there are sufficient funds in a Bank Account completion of an appropriate HMRC form allows the Revenue to withdraw funds directly from the account to meet the IHT.

Once all the necessary information has been collated we prepare an Inventory of the assets and liabilities and apply to the Sheriff Court for Confirmation. 

When Confirmation has been granted, giving the Executors legal title to deal with the estate, we can proceed to ingather the estate and pay off any liabilities. The estate is then distributed in terms of the Will.

What if the deceased died without making a Will?

There are detailed statutory rules governing what should happen. An application must be made to the Court to appoint an Executor (known as the "Executor Dative") and there are rules setting out who can be so appointed (normally the closest relative). The Executor must have what is known as a Bond of Caution (pronounced kay-shon) which is a specific type of insurance policy put in place to cover any future claims on the Estate. Once the Executor is appointed the process of ingathering the estate is the same as that set out above.

If there is no Will, we look to statutory provisions to determine who the beneficiaries are. Surviving spouses or civil partners have certain legal rights as do children. Beyond this there is a statutory “pecking order” which determines who should inherit.