Tax Planning in Wills: Trusts Flashcards
When does a discretionary trust created by will come into existence?
A. When the will is signed
B. When the trustees accept their role
C. On the grant of probate
D. On the testator’s death
D. On the testator’s death
Explanation:
A will trust comes into existence immediately upon the testator’s death, not when the will is written or when probate is granted.
In a life interest trust, who receives the income during their lifetime?
A. Life tenant
B. Trustees
C. Executor
D. Remainderman
A. Life tenant
Explanation:
The life tenant is entitled to the trust income during their lifetime, while the remainderman is entitled to the capital after the life tenant’s death.
What is a key practical benefit of creating a discretionary trust?
A. It fixes the exact entitlement of each beneficiary
B. It guarantees inheritance tax exemption
C. It ensures maximum tax savings at the testator’s death
D. It offers flexibility for future needs of beneficiaries
D. It offers flexibility for future needs of beneficiaries
Explanation:
Discretionary trusts allow trustees to adjust distributions depending on changing beneficiary needs.
John dies, leaving his entire estate to a discretionary trust where his children and grandchildren are beneficiaries. What is the IHT consequence at John’s death?
A. Immediate spouse exemption applies
B. No IHT at all applies
C. IHT applies, but assets are taxed again when children die
D. IHT applies on John’s death, but assets in trust are excluded from the beneficiaries’ estates
D. IHT applies on John’s death, but assets in trust are excluded from the beneficiaries’ estates
Explanation:
There is IHT due on John’s death, but assets in the discretionary trust are not part of the beneficiaries’ own estates for IHT purposes.
Which type of will trust allows trustees full discretion over income and capital?
A. Fixed interest trust
B. Life interest trust
C. Bare trust
D. Discretionary trust
D. Discretionary trust
Explanation:
In a discretionary trust, trustees have complete discretion about when and how to distribute income and capital among the beneficiaries.
Sarah’s will leaves £325,000 to a discretionary trust and the remainder to her spouse. What is the likely IHT outcome?
A. No IHT is payable at all
B. The £325,000 is taxed immediately at 40 percent
C. The £325,000 uses the nil rate band and the remainder is spouse exempt
D. All of Sarah’s estate is taxable immediately
C. The £325,000 uses the nil rate band and the remainder is spouse exempt
Explanation:
The amount placed into the discretionary trust (equal to the nil rate band) is taxed at 0 percent, and the residue passing to the spouse is fully exempt.
In a two-year discretionary trust post-death, why might trustees distribute assets within two years?
A. To avoid paying any income tax
B. To trigger a revaluation of assets
C. To treat the distribution as having been made under the will for IHT purposes
D. To create new trust structures
C. To treat the distribution as having been made under the will for IHT purposes
Explanation:
Under section 144 Inheritance Tax Act 1984, distributions made within two years are treated as if made by the deceased’s will, allowing exemption claims.
Mary creates a life interest trust for her second husband, and her children are remaindermen. Which of the following is correct?
A. No spouse exemption applies because the husband is not the outright owner
B. IHT is payable immediately on the whole estate
C. Spouse exemption applies for the trust value because the husband has the life interest
D. The children immediately receive the trust property
C. Spouse exemption applies for the trust value because the husband has the life interest
Explanation:
Spouse exemption applies because the spouse is the life tenant, even though the capital will pass to others later.
David creates a discretionary will trust for his children. 9 months after his death, the trustees decide to transfer the trust fund to his daughter outright. What impact does s144 IHTA have?
A. It treats the transfer as made by the daughter
B. It triggers a periodic charge
C. It treats the transfer as made by the deceased testator
D. It cancels the discretionary trust retroactively
C. It treats the transfer as made by the deceased testator
Explanation:
s144 IHTA applies to distributions within 2 years, treating them for IHT purposes as if made directly by the deceased under their will, enabling exemptions like NRB or spouse relief to apply correctly.
A life interest trust names George’s wife as the life tenant. What risk exists if George fails to allow the trustees discretion to advance capital to her?
A. Trustees cannot ever access the trust fund
B. Wife may have insufficient resources if income is too low
C. The trust assets are automatically distributed to the remainder beneficiaries
D. The spouse exemption is lost
B. Wife may have insufficient resources if income is too low
Explanation:
Without an express power to advance capital, trustees can only provide income to the life tenant. If income is insufficient, the wife could face financial hardship despite being the intended beneficiary.
