IHT and Trust Flashcards
Explain the effect of a gift into Disc Trust + the main implications.
- Lose future access - could lead to shortfall later in life.
- Gift reduced by annual gift allowance (18/19 & 17/18) - reduces value of transfer (IHT). Can’t use Annual exemption elsewhere.
- Treated as CLT - Immediately assessed against their NRBs.
- Remains a CLT for 7 years - Reduces available NRBs on death.
Recommend and justify
suitable protection policies (CLT gift)
- Level Term Policy on each donor’s life - Ben’s get full value of gift
S/A 40% of gift(s) - Covers IHT on estate and loss of NRB.
Plan in Disc Trust Executors - Quick release of funds to pay additional IHT. - WOL JL 2nd Death - Permanent Cover as DOD unknown - IHT payed 2nd death
- Plan in Disc Trust for Children - Quick release of funds to pay additional IHT
S/A IHT liability minus Level Term above - Ensure funds pay the IHT bill.
3.Gift intervivos (GIV) policy to cover the IHT due on the balance of gift less any annual exemptions Sergio has available. i.e. if gift is greater than NRB. In trust for who gets gift.
Factors to consider if IHT protection sufficient
RNRB increases
PETs dropping off
Future gifts drop off in 7 years
Care cost deplete estate
Estate increases - Windfalls, performance
Existing plan - allows increases?
Cost/Affordability/Willingness to self manage
DOV to Trust + wife PET (husband dies with a surviving wife wanting to gift to children).
DoV
- The DoV is within Sean’s available NRB, so no IHT liability will be incurred.
- By using a DoV the gift is immediately outside of Moira’s estate/ treated as if she had never received the funds.
- All growth in the value of the assets will also be outside of her estate.
PETs
- Moira can use her lifetime gift exemption of 2 x £3,000 to reduce the taxable value of the gifts.
- Wife in good health and is likely to survive the seven years before the gifts are outside of her estate.
- As they are PETs there will be no immediate liability to IHT.
- Wife still has her full NRB if she wants to gift to the trust in her own name.
- If a DoV was used to make all of the gifts, then IHT would be payable on £75,000/ by using DoV and PETS some of Sean’s nil rate band can be inherited by Moira’s estate on her death.
You have advised Moira that the funds within the discretionary trust established for her grandchildren should be invested into an onshore investment bond. Explain why you have made this recommendation.
- Likely term of the investment - how long until Uni?
- The underlying asset mix required - wide variety of funds in line with the trust’s risk.
- The tax benefits of an IB within a discretionary trust - no ongoing income/reporting. 5% rule.
- The position of the beneficiaries when they receive the funds - £1000 BRB and 38.1% and 45% - assign; and
- The benefits offered by an IB when paying funds to these beneficiaries. - tax deferred 20%
She has also included a provision that bequeaths 10% of her NET estate to the local Air Ambulance service, which is a UK registered charity.
Take charitable contribution off after the NRB and RNRB
Assuming you, as a SJP Partner, will be acting as the investment adviser and not as the trustee of the discretionary trust, describe how you would ensure the trustees were able to fulfil their ‘duty to invest’ obligations.
- Ensure the inv. strategy is structured to preserve the capital of the trust.
- Balance the interests of the various beneficiaries.
- Regularly review/reporting of inv./their performance.
- Ensure inv. are varied/diversified.
- Invest within parameters stated in the trust deed
The clients wish to maximise the estate passed to their intended beneficiaries. Comment on the suitability or otherwise of the couple’s current arrangements
(analysis of the current situation)
- The Wills – Is there one, valid, intestacy?
- Life Policy? In trust? Detail whether sufficient and who paid to. Should it be the executors?
- BR – EIS? Will it be outside of the estate if it has been held for at least two years and the small gifts are immediately exempt.
- All pension payments/income will cease – benefits paid to children?
- Will all other assets will form part of their estate.
- NRB will be reduced by gifts made, less the annual gift exemptions available as the gifts were made within the last seven years.
- RNRB - The value of their estate will be reduced by the full value of the RNRB/ £125,000 each if this is left to their children and estate worth less than £2 million.
Explain why periodic and exit charges may be charged on the trust assets in the future
- The value of trust assets may grow in value and exceed the available nil rate bands (at a future 10-year anniversary or on exit).
- If die within seven years of making any PETs they will become chargeable. (PETs done before CLT)
- If PET made in the seven years before the gift into the VDT, this will reduce the NRB available for the Disc. trust.
Identify the additional information you will need before advising on how best to invest the trust assets.
- Level of risk they would like to take.
- Ages of the beneficiaries.
- Likelihood of further beneficiaries.
- When will school fees start to be paid.
- Expected cost of school fees and likely increases in school fees in future.
- Whether school fees are to be paid as a lump sum or on a regular basis.
- Length of time they expect to pay school fees for.
- Expected timescale for paying lump sum house deposits.
- Level of involvement and complexity they are prepared to deal with.
- Whether they would be prepared to appoint a professional trustee or additional trustees.
Explain why the S/A paid from the Life Ass. solutions recommended above are unlikely to exactly match the inheritance tax liability on the second death.
- It is not possible to accurately state the value of the estate on death / cannot predict the future value of their investments and their house.
- They may make further gifts in future.
- The NRB / treatment of gifts / IHT tax rate may change in the future.
- Their estate may be depleted by more than anticipated, e.g. costs of long-term care / their estate may increase by more than anticipated, e.g. an inheritance or lottery win.
Outline three potential benefits and three potential drawbacks of taking out a whole of life policy to cover the IHT liability.
WOL - benefits
- Will cover most / all of the IHT liability on 2nd death/ immediately covers IHT liability/ assets within the estate will not need to be sold to pay IHT.
- Maintains the use of all of the couple’s assets during their lifetime.
- As in trust will not increase the value of the estate liable to IHT
- If payment of premium is classed as a gift out of normal expenditure, it will reduce the value of their estate.
WOL - drawbacks
- Will increase expenditure/ can be expensive.
- No guarantee that the liability will be covered/ may under insure.
- Estate will remain above £2 million threshold for RNRB
Outline three potential benefits and three potential drawbacks of making lifetime gifts to reduce the IHT liability.
Lifetime gifts - benefits
- No cost involved/ children benefit immediately.
- Not assessable to IHT if they survive 7 years.
- Can make use of exemptions (annual exemptions / gifts out of normal expenditure) / growth on amount gifted is immediately outside of estate.
- Helps to reclaim some / all of the RNRB.
Lifetime gifts - drawbacks
- Loss of access to funds / may be left with insufficient investment funds and have to draw on pensions (which is not their intention).
- Fully assessable if they die within 7 years.
- A gift made may be accessible if child divorces.
