Aim 3 - To make a gift to their grandchildren to help with university costs

Question 1

Fact Finding - gift to grandchildren

Answer 1

• do they wish to make an outright gift to Anna/grandchildren?
• do they wish to use trusts/ownership/control of investment?
• do they wish the children to have access at age 18?
• do the younger grandchildren have child trust funds/does older grandchild have a junior ISA?
• use of ISAs/JISAs/child trust funds for younger children/other tax free products
• use of protection products

Question 2

What are the pros and cons of placing a cash settlement into a discretionary trust for the grandchildren?

Answer 2

Pros
- trustees have discretion over who receives income and who gets capital
- they can ensure that children only get their share when they feel they are financially responsible
- their wishes will be catered for
Cons
- the transfer will be chargeable lifetime transfer - but as within NRB no upfront tax to pay
- won’t be outside of their estate until 7 years have elapsed

Question 3

Who can be a trustee?

Answer 3

• someone over the age of 18
• someone of sound mind
• can be an individual or a corporation
• there can be any number

Question 4

What are the duties of trustees?

Answer 4

• to hold trust property and to administer it for the benefit of the beneficiaries
• hold the title documents to any trust property
• everything they do must be for the benefit of the beneficiaries
• take account of the standard investment criteria
• monitor investments
• avoid conflicts of interest
• use utmost diligence
• keep proper accounts

Question 5

Differences between making the proposed gift for the grandchildren’s uni fees into a bare trust or a discretionary trust

Answer 5

Bare Trust

• transfer in is a PET
• IHT free after 7 years
• No IHT initially
• Beneficiaries cannot be changed
• Beneficiaries can demand the trust fund at age 18
• Income is taxed on the beneficiary using their own rates and personal allowance
• capital gains are taxed on beneficiary using their rates and full annual exempt amount
• if death occurs within 7 years any IHT liability is chargeable on the recipient/donee. Fund forms part of beneficiary’s estate on death

Discretionary Trust

• transfer in is a CLT
• IHT free after 7 years
• only IHT initially if transfer is over the NRB and then at 20% if trustees pay and 25% if settlor pays
• Trustees have discretion to change beneficiaries
• the trustees have control over who gets income and who gets capital. The beneficiaries do not have a right to either
• the trust has a basic band of £1,000. Above this the trustees are charges at the rates applicable to an additional rate tax payer
• the trust has a CGT exempt amount of half the normal amount (split between the no of trusts set up by settlor/min 1/5 each). CGT rate for trustees is 20%
• at outset if gift above NRB. Back in estate if death within 7 years. Trust fund potentially chargeable to 10 year charge (periodic charge) - no more than 6% as well as exit charges when capital distributed (no more than 6%)

Question 6

Advantages and Disadvantages of using a discretionary trust

Answer 6

Advantages

• if transfer is below NRB - although it is a CLT, there is no upfront tax to pay
• the trustees have full discretion as to who can receive income and capital
• beneficiaries can be changed at the discretion of the trustees

Disadvantages

• periodic charge every 10 years if the value exceeds the NRB and potential exit charges on capital distributions
• income tax at basic rate on the first £1,000 then at additional rates of tax for other types of income.

Question 7

Advantages and Disadvantages of using a bare trust

Answer 7

Advantages

• the gift will be exempt transfer for IHT purposes
• the full personal allowance of the grandchildren can be utilized for income tax purposes
• the full CGT exempt amount can be used against any capital gains
• parental settlement rule will not apply as grandparents investing
• money can be withdrawn to pay fees at any time

Disadvantages

• cannot change the beneficiaries
• beneficiaries will be entitled to the trust property at age 18
• forms part of the IHT estate upon death of a beneficiary

Question 8

Explain how Jim and Sandra could use an Investment Bond to support their grandchildren once they are at university

Answer 8

• assign whole segments of the bond to children
• assignment is not a chargeable event
• assignment is not a gift for IHT purposes
• tax liability passes to children
• they have their own personal allowance/potentially no tax for the children
• saving tax for Jim and Sandra