Trust and related tax planning solutions Flashcards
Explain 5 benefits and 5 drawbacks of using a discretionary loan trust for IHT planning (10)
Benefits
- The growth is outside the settlors estate for IHT purposes
- The value of the capital used to fund the trust is effectively frozen in the estate
- Settlor has flexible access to repayment of the loan on demand
- Settlor can take tax deferred withdrawals if invested in a bond /collective investment using annual exempt amount
- Flexibility as to who will benefit after the loan has been repaid
Drawbacks
- There is no immediate gift for IHT purposes
- Any outstanding loan remains in the settlor’s estate for IHT purposes
- Any outstanding loan at the time of the settlors death will pass under the settlor’s Will or intestacy
- The IHT benefits are reliant on future investment growth
- The loan being largely/fully repaid by the settlor
- and the settlor spending the loan repayments
- The settlor’s withdrawals will cease after the loan has been repaid
Explain the actions taken to remove a trustee who is losing mental capacity (7)
- Individual could retire as a trustee is they still have some mental capacity
- It may be possible to dismiss them as a trustee
- using express powers in the trust
- They could b replaced as a trustee;
- by the other trustees;
- once they have lost mental capacity;
- under s36 Trustee Act 1925
- Or a replacement trustee could be appointed by the court
State the relevant factors that should be considered prior to advising a client to make a large transfer of capital into a discretionary trust for the benefit of grandchildren (10)
- Affordability
- Access/ Will they need income or capital in the future
- Timescale/when should the beneficiaries benefit
- Health/ will they love for 7 years
- Do they have an IHT/CGT liability
- Amount of transfer/ if over NRB = CLT
- Previous gifts
- Who the trustees will be
- How the capital will be invested/risk
- Tax implications of a discretionary trust
- Use of gifting allowances
Explain the different areas the trustees of a discretionary trust should consider when conducting a trust review (11)
- Are the trust investments vested in the trustees names
- Is the trust deed being adhered to/change of trustees circumstances
- Are the investments still suitable/diversified
- Investment performance/benchmarking
- Specialist investment advice required
- Economic changes
- Legislation/tax changes
- Any beneficiaries changed since the last review/death
- Any changes to beneficiaries CFL/ATR
- Any need to pay income/capital to beneficiaries
- Any tax liabilities/ how will the trusts pay the tax?
- Charges
Explain how a typical back-to-back arrangement operates (10)
- Lump sum is invested in an own life purchased life annuity
- An own life policy is taken out under trust
- Can be single or joint life second death basis
- Individual will need to be in good health when life policy is underwritten
- Income from PLA pays premiums on the life policy
- The capital element of the annuity is tax free; interest element is taxable
- Premiums are CLTs unless the £3k annual exemption/normal expenditure exemption can be used
- On death the annuity stops with no value for IHT purposes
- the sum assured from the life policy pays to the trustees/can distribute to the beneficiaries
- No income tax charge because the life policy should be qualifying
- The life policy under trust is not part of the estate for IHT
- the individual is not a beneficiary of the trust, so there should be no gift with reservation or pre-owed asset tax
- To work effectively for IHT planning it must be proved that the life policy and the annuity are not associated
State 6 examples of where a dispute can arise between the beneficiaries of a trust and the trustees (6)
- Breach of trust
- Investment concerns/performance/advice
- Trust deed clarity
- Poor trustee administration
- Unfair beneficiary treatment
- Poor trustee conduct/refusal to act
- Trustee unfit
- Misunderstanding between parties of the trust
- Trustee advice/adviser issue
Describe the actions adult beneficiaries can take against the trustees when a dispute involving the trust arises (6)
- They could both attempt to resolve the dispute via mediation/arbitration
- the beneficiaries can bring the trust to an end/demand the trust property from the trustees (Saunders v Vautier (1841) if aged 18+, as long as there is no possibility of further beneficiaries and are in agreement with full mental capacity
- If all else fails, they can start legal proceedings
Explain how a loan trust scheme operates (10)
- The settlor sets up the trust and makes an interest-free loan to the trustee/trust
- The trustees invest this into an investment bond/collective investment
- No transfer of value for IHT occurs because the settlor has not made a gift
- The settlor is usually appointed as one of the trustees
- Any future growth is held for the benefit of the beneficiaries and accrues outside the settlors estate
- The settlors entitlement from the trust is limited to the amount of the original loan
- If any loan is still unpaid at the time of death, it will form part of the settlors estate for IHT purposes and pass under the Will/intestacy
- the settlor has control over/access to, their original loan capital and can demand the balance of the outstanding loan at any time
- The loan can be repaid in ad-hoc/regular installments
- Withdrawals can be made in a tax efficient manner from 5% pa single premium bond
- When calculating the potential IHT charge on each 10y anniversary, the value of the trust fund will be reduced by any loan still outstanding to the settlor
- Loan repayments to the settlor do not attract IHT exit charges
When may an interest in possession trust may need to be reviewed (8)
- Death of the life tenants/remaindermen/trustee/settlor
- Changing income needs of the life tenants
- Bankruptcy of settlor/trustee/beneficiary
- Loss of capacity of trustee/beneficiary
- Residency of trustee
- Marriage/separation/divorce of beneficiary
- Where there is a dispute between trustees/beneficiaries/settlors
- Changes in taxation/legislative changes
- Economic changes
- Where the investments are not providing the right balance of income and capital growth
- Where there has been a change to CFL/ATR of beneficiary
- Performance issues
