What Exactly Is A ‘Section 144 Discretionary Will Trust’?

Many people have not written a will. Presumably, one of the reasons is that none of us want to think too closely about our own demise. 

There are three key aspects which require consideration: first, who should inherit; second, what should they inherit; and third, how should they inherit.

This article looks at the ‘how’ aspect.

The legal nature of the will is that it effectively comprises a number of gifts usually, but not necessarily, to close family members (e.g. spouse, sons/daughters, brothers/sisters, etc.). Thus, for example, John Smith in his will may state ‘I give my war medals to my only son, Thomas’. This is an outright gift with no strings attached; the gift is effective once John dies (before his death he could if he wanted change his mind and, for example, decide instead to leave his medals to the War Museum).

Alternatively, instead of making outright gifts John could leave some assets he owns on trust. For example, John could decide that his buy-to-let property is to be left on trust, with the rental income to go to his surviving wife Mary during her lifetime and on her death the trust is to sell the property and the net proceeds are to be divided equally amongst his one son and two daughters.

However, it may be that the more John thinks about what he wants to do with all his assets, the less certain he is as to what is best. 

For example, he has a portfolio of share investments, but he is not certain who he feels should inherit. He thinks he would like the bulk of the portfolio to eventually to go to the two of his children who may at that time be in most need of financial help. John also operates a business that he would like to leave to one of his daughters (although he is not sure which), but he has been advised that it is not beyond doubt as to whether, for inheritance tax (IHT) purposes, the business will qualify for 100% business property relief on his death.

The answer to John’s dilemmas is the discretionary will trust.

The discretionary will trust is a trust which is set up by John in his will. It is discretionary in nature, which means he leaves it to the trustees of the trust to ultimately decide which of the beneficiaries listed in the trust document should benefit from the trust assets, and to what degree. The beneficiaries might, for example, comprise his wife, three children and their grandchildren.

Apart from the matrimonial home, which he leaves directly to his wife, and the buy-to-let property, which he leaves on trust (as indicated above, namely, on what is called an interest in possession as opposed to a discretionary trust), he leaves the rest of his assets, including the share portfolio and his business, on a discretionary will trust.

What this does is to allow John to defer making any immediate decisions as to who, and in what proportions, this part of his estate should be inherited. He effectively delegates this to his trustees (n.b. John can choose them) who can take such decisions at a future time in the light of the then prevailing circumstances of the beneficiaries. Thus, for example, after his death if one of the daughters marries a millionaire (which when John drew up his will he had no idea about) and she informs the trustees that she really does not need any more money, the trustees might decide to distribute any of the trust’s income and/or assets only to John’s other daughter and son.

Not only does the discretionary will trust allow flexibility, but it also offers John possible IHT advantages.

Under the relevant IHT legislation (IHTA 1984, s 144), where property comprised in the discretionary will trust is appointed out to a beneficiary albeit within two years of the testator’s death (John in our case), it will for IHT purposes be treated as if the testator had simply left the property directly to that beneficiary, i.e. in a sense, the trust is ignored and no IHT ‘exit’ charge (which may arise when property leaves a discretionary trust) arises. 

For example, if following John’s death HMRC does not accept that his business qualified for 100% business property relief for IHT purposes, an IHT charge would arise on the value of the business were it to be left, say, to one of his daughters. But, because John left it on discretionary trust the trustees can simply appoint the business out to John’s wife instead, which would then qualify as an exempt inter-spouse transfer, and an IHT charge would be avoided. 

In addition, generally speaking, no capital gains tax charges arise on any appointments out of such a trust (assuming appointment within the two-year deadline).

Where a testator has any uncertainty as to who, how much and when his beneficiaries should inherit, the s 144 discretionary will trust may be the ideal answer.