Taxation Trust and their uses

Question 1

What is a trust?

Answer 1

• Trust is an arrangement where one party (the settlor) can give assets
  to another (the beneficiary) without the beneficiary gaining control of the asset.
  -This is achieved by creating a trust, through which a third party (the trustee) looks after the asset for the beneficiary

Question 2

Why do people create a trust?

Answer 2

• once a gift has been made into a trust, the property will be out
  of the settlor’s estate for IHT purposes
• policies in trust do not have to go through probate or
  administration, and so the benefits can be paid out within days or weeks of submitting a claim.

Question 3

What are the uses of a trust?

Answer 3

• inheritance tax planning
• to provide for family members in the event of the settlor’s death
• the trust could provide benefits for a spouse, and then for the children on the spouse’s death and for their children
• Trusts can be set up to provide funds for the care of disabled or mentally incapacitated family members

Question 4

What are the 3 parties of a trust?

Answer 4

The settlor
The trustee
The beneficiary

Question 5

What are the three certainties to ensure a trust is valid?

Answer 5

• there must be a clear intention from the settlor
• there must be documents which make it clear what property belongs to the trust
• settlor must make it clear who the beneficiary is

Question 6

will the trustee be able to benefit from the assets once they are placed into the trust?

Answer 6

No the settlor loses direct control and cannot usually benefit from them. The trustees have a duty to look after the interests of the beneficiaries

Question 7

Will any growth of an asset placed into a trust be apart of the settlors estate?

Answer 7

Growth on assets placed in trust will be outside the settlor’s estate and will not be subject to IHT on their death

Question 8

What are some types of trusts?
name atleast 4

Answer 8

Will trusts
Absolute (bare) trust
interest in possession trusts
Immediate post-death interest trusts
Discretionary trust
Life assurance trusts
Gift and loan trust
Discounted gift trusts

Question 9

What are some characteristics of a Absolute bare trust?

Answer 9

• for on or more beneficiaries
• simplest form
• trustee will only look after the assets until required to pass them on
• inflexible ( terms cant be changed)

Question 10

What are some characteristics of a discretionary trust?

Answer 10

• trustees are given some powers
• to appoint beneficiaries from a specified category or categories set out by the settlor for example, the settlor’s wife, any of their children and their issue
• to decide whether to pay income or capital to any of the beneficiaries, or not to pay any benefits, as they see fit

Question 11

What type of trust is mostly used to avoid IHT liabilty and why?

Answer 11

Gift and loan trust
It can be used to be efficient in transfering gifts and investments.

Question 12

how does a discounted gift work?

Answer 12

The value of the settlor’s rights is taken away (discounted) from the total gift – it leaves their estate at that point. The remaining investment is counted as a gift for IHT purposes – the discounted gift. Life expectancy is an essential part of the equation, and the value of the discount is higher for younger people; the arrangement is not suitable for those in poor health.

Question 13

are transfers of assets into a trust are subject to the IHT regime?

Answer 13

yes Transfers of assets into a trust are subject to the IHT regime.

Question 14

Question 15

Tax implications for Absolute trust

Answer 15

Beneficiary is responsible for paying any income tax on trust income.