Define: Exemption Trust

“An exemption trust, also known as a nil-rate band trust, is a legal arrangement commonly used in UK estate planning. It allows individuals to maximize the inheritance tax (IHT) exemption available to them upon their death. In the UK, each individual has a nil-rate band, which is the amount of their estate that is exempt from IHT. As of 2021, the nil-rate band is £325,000.

By creating an exemption trust, individuals can transfer assets up to the value of their nil-rate band into the trust during their lifetime or upon their death. These assets are then held separately from their estate and are not subject to IHT. The trust can be set up for the benefit of the individual’s chosen beneficiaries, such as their spouse, children, or other loved ones.

One of the key benefits of an exemption trust is that it allows individuals to pass on their wealth to future generations while minimizing the impact of IHT. By utilizing their nil-rate band, individuals can effectively double the amount they can pass on tax-free. This can be particularly useful for individuals with significant assets that would otherwise be subject to IHT.

It is important to note that exemption trusts have certain rules and limitations. For example, any assets transferred into the trust must be irrevocable, meaning they cannot be taken back by the individual. Additionally, there may be tax implications associated with setting up and managing the trust, so it is advisable to seek professional advice from a solicitor or tax specialist.

Overall, an exemption trust is a valuable tool in UK estate planning, allowing individuals to make the most of their IHT exemption and ensure their wealth is passed on to their chosen beneficiaries in a tax-efficient manner.”

A bypass trust funded with an amount no larger than the personal federal estate tax exemption in the year of death. If the trust grantor leaves property worth more than that amount, it usually goes to the surviving spouse. The trust property passes free from estate tax because of the personal exemption, and the rest is shielded from tax under the surviving spouse’s marital deduction.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 29th March, 2024.