THE DISCRETIONARY WILL TRUST.

A Discretionary Will Trust is a specific type of Trust wherein no individual has an automatic right to the Trust property.  The Trustees are granted discretion by the Settlor to choose which of the ‘potential' beneficiaries will receive the benefit of the Trust and at what time and in what proportion this benefit will be given.  The Trust is settled within the Settlor's Will as opposed to being a separate issue.

THE NIL RATE BAND (MINI) DISCRETIONARY WILL TRUST.

The nil rate band Discretionary Will Trust is a very useful instrument in mitigating Inheritance Tax.  It can work as follows: 

Say Mr and Mrs Rich have an estate worth over £570,000.  Their Wills state that all their possessions should pass to the surviving spouse and subsequently to their children.

At the point of the first death, the transfer between spouses is free and the estate only becomes liable to Inheritance Tax at the second death.  At this point the first £285,000* (nil rate band) is also free. 

Mr. and Mrs Rich adjust their Will to include a nil rate band Discretionary Trust.

Mr. Rich dies leaving a Trust settlement in his Will.  This says that up to the prevailing nil rate band of his estate should be placed in a Discretionary Trust.  (At the present time this is £285,000*).  This counts as a free transfer for Inheritance Tax because (by definition) the value transferred is less than the prevailing nil rate band.

Mr. Rich has appointed his wife, Mrs Rich, as Trustee along with his solicitor, Mr. Honest.  Mrs Rich and her two children and four grandchildren all form part of the ‘class of potential beneficiaries'.  Mr. Rich's Trust does not belong to any one of them, yet could belong to any of them!

Let us say Mrs Rich dies having controlled the Trust for some years, but never having exercised discretion over who should receive capital.  She leaves a letter of request with her Will to wind up the Trust in accordance with the wishes of her late husband (and herself) giving say 50% of the fund to each of their children.

This means a transfer of value has taken place between Mr. Rich and his children which is totally free of Inheritance Tax.  In addition to this gift the children will receive the inheritance of their Mother, the first nil rate band's worth of which will also be free of Inheritance Tax.  By using this system the children will benefit from two lots of free (nil rate band) transfers instead of one.  A very satisfactory arrangement!