What is a will trust iou?
Unmarried heterosexual couples and same sex partners who are not civil partners - in other words people with partners who are not ‘spouses’ or equivalent miss out on a tax advantage given to those who are married or in civil partnership.
Most couples leave their estate to each other when they die. Then, when the
second one dies, the taxman takes his share of 40% on everything over £325,000 or £500,000 if property owners (tax year 2020/21).
However, with a Discretionary Will Trust written into both partners’ Wills it could mean that they could collectively pass on to their respective families up to twice that amount (£1,000,000), thus saving on Inheritance Tax. The arrangement also permits the surviving partner to receive an income from the estate of the first to die.
How does the Trust work?
By including within each partner’s Will the wording for an IOU Discretionary Will Trust the estate, up to the nil rate band, of the first person to die will pass to the trust with any balance over this amount commonly going to the surviving partner.
Use of the family home
For such an arrangement to be effective it may require the ownership of the home to be either in one of the couple’s sole name or under a tenancy in common arrangement allowing them both to leave a fixed share of the home to whoever they wish in their Wills.
There are still problems to be overcome if the surviving partner wishes to
continue living in the property after the first partner has died, failing which the whole Inheritance Tax effectiveness of the trust may be undermined. A popular solution to this is:
Within the Discretionary Will Trust, wording must be included giving special powers to the trustees to take a legal charge over the assets that pass to the survivor on first death or to accept an ‘IOU’ from the survivor, as an asset of the trust. With the use of an IOU, the estate, and their share of the home, of the first person to die can go wholly to their surviving partner with the trust simply consisting of the IOU provided by the survivor.
On the second death, the trustees would redeem their charge or IOU and this would be funded from the survivor’s estate pre the calculation of inheritance tax.
