Weapon of choice

Discretionary will trusts (DWT) have been part of the estate planning landscape for a long time. Historically, their key role has been to ensure that (for married couples) an unused nil rate band wasn't needlessly lost on the first death.

From 2007 however, the introduction of the transferrable nil rate band meant that any unused allowance wouldn't be lost, but would be 'inherited' by the survivor. Where, as often happens, everything is left to the spouse (which of course doesn't itself use up any of the allowance) the surviving spouse therefore enjoys a double allowance on their eventual death.

Since 2007, many solicitors have entirely dropped their recommendations for will trusts, and some have even advised their clients to rewrite their wills to remove them. The new main residence nil rate band will no doubt lessen interest in them further.

Does this mean that the DWT is dead? I don't think so at all. Although their key role has undoubtedly been diminished, this was never their only purpose; good reasons remain for using them as a planning measure.

Long term care fees

With an ever aging population, long-term care fees are an increasing concern and in particular, what happens to the family home. The use of a DWT (usually coupled with tenancy in common) allows the surviving spouse to benefit from the deceased partner's assets by way of loans from the trust, while keeping them out of reach for local authority fees assessments. The surviving party might therefore have to spend their half of the family's estate, but the deceased party's half is ring fenced.

In practical terms, in order to protect the surviving party from being consigned to a less than ideal care home, the trustees can agree with the local authority to make voluntary third party top up payments. Importantly however, this third party top up doesn't reduce the local authority contributions.

Future generations

The use of a discretionary will trust might not save any IHT on the deaths of the married couple, but it does keep the money out of their children's estates. Many people only inherit their parent's estate at an age when they themselves have IHT complications on the horizon.

For this reason, many of my clients would prefer not to receive an inheritance directly. They prefer to have access to a pot of money external to their estates. (For this reason, where the will doesn't include a DWT, deeds of variation are sometimes used to create them).

Complex families

Families are increasingly complex with second or third marriages and a myriad of stepchildren and step-grandchildren. In these situations, leaving the estate to the current spouse might cause real or perceived inequities between different parts of the family. A DWT with independent trustees can be used to minimise this risk, allowing the protection of the interests of some parties while still allowing flexibility.

Subsequent remarriage

While it is true that the transferrable nil rate band does lessen the need for a DWT, remember that with people living much longer, it is no longer particularly uncommon for clients to remarry after the death of their spouse.

Of course, half of those who remarry will eventually find themselves widowed for a second time. Under the transferable nil rate band rules, you can only inherit one allowance, but with the first having been secured separately in the trust, the client would inherit the later spouse's allowance in the normal way. Thus the family would receive three rather than two nil rate bands.

As with all planning arrangements of this kind, there are more circumstances than can be given here, some of which make a DWT very advantageous. While it's true that their everyday automatic inclusion is a thing of the past, we should be careful not to dismiss this important tool in the armoury of financial planning. 

Scott Gallacher is a director at Rowley Turton

He writes the regular IFA comment in Private Client Adviser

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