IHT

Question 1

Name 4 key elements of a DGT

Answer 1

1. A trust where Alex makes a cash gift into a trust and is invested (usually into an investment bond via a discretionary trust)
2. A DGT allows Alex to gift a lump sum into the trust whilst retaining the right to a specified income from the lump sum, this income is just withdrawals of capital
3. The level of initial IHT discount Alex receives depends on income, age and health. Which should be attractive.
4. Remember, that any amount over the discount is classed as a CLT so could be IHT issues for Alex if he dies within 7 years

Question 2

Give 4 reasons why a client would use a DGT

Answer 2

1. To see an immediate reduction in the value of their estate
2. Receive a specified income for remainder of their lives
3. Give up access to un-needed capital
4. Retain flexibility (if using a discretionary trust) as to who and when benefits from the trust

Question 3

What is the key difference between a DGT and a loan trust

Answer 3

With a DGT the client receives an immediate IHT reduction, whereas with a loan trust they will make IHT savings over time

Question 4

3 key features of a loan trust

Answer 4

1. Settlor makes an interest free loan to the trust and is repayable on demand
2. The loan is then invested into an investment bond with future growth outside of the clients estate
3. The settlor/client still has access to capital through either lump sum or regular withdrawals

Question 5

Outline the requirements for a valid will

Answer 5

W - Written
I - intentionally made
L - Testator must have Legal capacity of sound mind
L - Legal document, original only
S - Signed by testator and witnesses

Question 6

What could invalidate a Will? (3)

Answer 6

Revoking the will by testator
Making a later will
Marriage
(Divorce does NOT revoke a will)

Question 7

Give 3 facts on Absolute/Bare trusts…

Answer 7

This type of trust has fixed and unchangeable beneficiaries
Trustee transfers property to the beneficiaries at a state age, usually 18
Most bare trusts become an Absolute trust when the beneficiary reaches 18

Question 8

What is an Interest in Possession trust?

Answer 8

A trust where there are two types of beneficiary
The life tenant has the right to the trust income during a specified period/ until death
The remaindermen have a right to the trust assets once the life tenants interest expires

Question 9

Give 8 duties of a trustee of a trust

Answer 9

Act for the benefit of the beneficiaries
Treat all beneficiaries fairly
Be the registered legal owner of all the trust property
Act in accordance with the trust provisions, investment instructions and trust law
Use utmost due diligence
Review investments regularly
Invest cash paid into the trust
Make claims on any life policy (Alex’s term assurance)

Question 10

Benefits of an LPA (4)

Answer 10

Provides peace of mind for the donor
The donor can grant the attorney specific wishes so it remains personal to them
Quicker and cheaper than going through the court of protection
Avoids family disputes

Question 11

Name 3 financial transactions an attorney can make on behalf of a donor, presuming a property and financial affairs LPA is set up

Answer 11

Pay bills
Claim benefits
Operate the bank and savings accounts
Buy/sell investments

Question 12

State 6 requirements of setting up an LPA

Answer 12

Donor must have mental capacity
There must be no undue influence from other parties
Documents must be dated, signed and witnessed
Attorneys cannot be subject to a debt relief order or be bankrupt
Attorneys must be 18 and of sound mind
A certificate provider must be involved, who must also be at least 18
The LPAs must be registered with the Office of the Public Guardian

Question 13

Name 5 easy methods anyone can do to mitigate their IHT liability

Answer 13

Ensure there are up to date wills in place
Utilise annual gift allowance of £3,000
Use annual small gift allowance of £250
Ensure nomination of beneficiary forms have been completed for any pension assets
Set up an LPA

Question 14

Can you carry forward the previous tax years annual gift allowance?

Answer 14

Yes but only looking back one previous tax year, no more

Question 15

How might a bereaved minors trust in Alex’s will help the kids in the event of Alex’s death?

Answer 15

Reduced admin for the kids upon Alex death
Children automatically inherit trust assets at age 18
IHT efficient
Money can be used for schooling or education
Effectively taxed at childrens rates
No exit charges
Flexible, trustees can convert to a new trust at 18

Question 16

State 4 benefits & 4 drawbacks of having an up to date LPA for Alex?

Answer 16

Benefits
Avoids delays
Alex’s wishes are taken out by the LPA’s in both financial and health affairs
Alex’s wishes would’ve changed since Tanya’s death so these will need to be reflected
Minimises potential disputes

Drawbacks
Can take a while to get it granted from the OPG
If mental capacity is lost then the LPA cannot be revoked
Can be costly to draw up and ultimately never used
IHT planning is extremely restricted once the power comes into effect

Question 17

State 6 duties and responsibilities of an LPA

Answer 17

Attorney has a duty of care to carry out the donors instructions
Must not take advantage of their position
Must act in good faith
With the settlors best interests at heart
Must follow any instructions and preferences laid out in the LPA
Must comply with directions from the Court of Protection

Question 18

What must Alex execute in order to create a Bereaved Minors Trust?

Answer 18

He must execute a deed of variation, as the kids are under 18 they qualify for the bereaved minors trust

Question 19

What is the taxation treatment of income paid to Thea or Cameron via a trust set up by Alex?

Answer 19

Known as the Parental Settlement Rule: Any income below £100 is paid tax free, anything above this would be assessed on Alex as a higher rate tax payer

Question 20

Give 3 benefits and 3 drawbacks of using a Discretionary trust for Alex

Answer 20

Benefits:
Alex could be a trustee so retains some control
Trustees can allocate trust assets to beneficiaries as and when appropriate (flexibility key for Alex)
Protect assets from creditors in the event of bankruptcy

Drawbacks:
Assets over £325,000 could be subject to 6% charge every 10 years
Income arising from the trust subject to the £100 limit per child (anything over this amount taxed at Alex’s marginal rate)
Appointing professional trustees usually has a cost

Question 21

What are the conditions for a deed of variation to be valid (5)?

Answer 21

Must be drawn up within 2 years of death
Only those giving up the benefit need to sign the deed
All beneficiaries must be of sound mind
Must be in writing
The deed must refer specifically to the will

Question 22

What is the main difference in the set up of a property/financial affairs LPA vs a Health and welfare LPA?

Answer 22

Property and financial affairs LPA can be used while the donor STILL has mental capacity

Whereas the health and welfare can only be used once the donor has lost mental capacity

Question 23

What is the difference in income tax position for a Bare trust vs Discretionary trust?

Answer 23

Bare trust: income is simply taxed on the beneficiaries marginal rate
Discretionary trust: the trust can use the standard rate band of £1,000. Above this the trustees are charged at the rate applicable to an additional rate tax payer

Question 24

What is the CGT rate for trustees of a discretionary trust?

Answer 24

20%

Question 25

What is the value of Alex’s estate (after all inheritances from Tanya)?

Answer 25

Total estate = £1,028,000. IHT liability would be £11,200
This is assuming £115,000 from Tanya’s pension stays in a pension environment.

Question 26

Why might a loan trust be more appropriate than a DGT for Alex’s circumstances?

Answer 26

A loan trust is more flexible, with Alex determining how much income he wants to take as and when he wants. As his children’s lifestyle/dependency will drastically change over a short number of years, this flexibility is key.