Estate Planning Flashcards
Name the 4 steps of calculating IHT.
- Calc total value of client’s assets
- Deduct loans & BR assets
- NRB & RNRB
- Apply 40% tax
Who are loan trusts suitable for?
Those who are either unwilling or unable to give outright gifts as they may require access to their original capital on either a regular or ad hoc basis.
What needs to be available to set up a loan trust and what must the settlor be willing to give up?
- a lump sum
- access to any future growth
How does a loan trust work?
- settlor makers loan to trust (money invested)
- loan repayable on demand so settlor can ask trustees at any time
- trustees invest money via inv bond
- any growth is then outside estate
- though original amount still owed and in estate on death
- take money out of bond if needed (5% deferred capital withdrawals)
Name 4 benefits of loan trusts.
- client will always maintain access to their capital
- flexible
- growth on bond exempt from IHT
- can select specific beneficiaries
- not a PET or CLT so no NRB used
- no underwriting requirements
Name 3 drawbacks of loan trusts.
- original debt from trust will be outstanding at death and comes back into estate for IHT
- income would cease after 20 yr period if 5% income was selected
- only works for IHT if client spends money from income withdrawn
- annual IHT exemptions cannot be used as it’s a loan, not a gift
What is a DGT?
A trust arrangement that allows someone to gift money while still receiving regular payments from it.
“Discounted” refers to the fact that the value transferred into the trust is less than the amount invested.
What is the goal of a DGT?
To reduce the amount of IHT that will be owed when the settlor dies.
WIth a DGT, what must the client be willing to happen when the agreed lump sum of capital is placed in the trust?
Must be willing to lose access to it.
What do DGTs invest the funds into?
A Single Premium Life Assurance Investment Bond
(SPLAIB!)
Under DGTs the lump sum is notionally split into 2 parts following underwriting.
What are they and how are they treated?
- discounted element … removed from estate (along with £3k IHT exemption(s))
- balance treated as either a CLT (discretionary trust) or PET (bare trust)… will also be exempt from IHT after 7 years
Under DGT’s, name 3 things the discounted element is based upon?
- Client’s age
- health
- and level of likely income client will receive back during their lifetime
Under DGTs if client is in good health, discount should be ~.
higher
Name 4 benefits of DGTs.
- bond provides a guaranteed income with no further tax if income withdrawals < 5% of original capital
- no IHT on residual growth on bond
- if non discounted element is under IHT threshold/NRB, would be a PET/ CLT and outside estate after 7 years
- NRB/RNRB legislation could change
- all or specific children can be selected to benefit upon death
- can use annual IHT exemptions on set up to reduce PET/CLT
Name 4 drawbacks of DGTs.
- inflexible as cannot vary income £s
- lose access to capital
- underwriting requirements
- if written under a discretionary trust, periodic & exit charges may apply
- if client dies within 7 years, DGT will become a failed PET/CLT and use up some/all of NRB
- if classed as a CLT, immediate charge if amount invested > available NRB
