Trusts Flashcards
Why create a Trust
6 points
Asset preservation
Vulnerable beneficiaries
Protects against marriage and divorce
Intergenerational gifting
Estate tax planning
Increased flexibility
Bare Trust
Allows settlor to gift assets to a single beneficiary
Access to the funds once they reach 18
Beneficiary will have immediate right to both income and capital of the trust
Beneficiary cannot be changed
No limit on how much can be gifted
Interest in Possession Trust / Life Interest
Allows the Settlor the transfer assets into the Trust for the benefit of a specified beneficiary for life (or specified period)
Can be set up during lifetime or on death in the Will
Charitable Trusts
Allows settlor to transfer funds for the benefit of charities
Discretionary Trust
Allows settlor to transfer assets into Trust for the benefit of the Discretionary Beneficiaries
Settlor chooses Trustees and beneficiaries
Trustees have discretion over how to pay the funds out to beneficiaries’
Trustee duties
When must a Trust be registered
Trust created on or before 6th April 2021 - must be registered on or before 31st Jan after the tax year in which liability occurred
or for a first time liability by 5th October after the end of the tax year in which the liability occurred
Trusts created after 5th April 2021
Must be registered within 90 days of the Trustees becoming liable to UK tax
Trustee Duties
Keep accurate and up to date records
Decision making
Asset management
Investment duties and diversification
Protecting interests of beneficiaries
Act with honesty, integrity and objectivity
Costs
Solicitor Fees
Accountancy Fees
Investment management fees
taxes
Loan Trust
(main ben - growth outside of estate)
for client who want to carry out IHT planning but want access to capital
A Loan Trust enables the settlor to make an interest-free loan into trust, such that they gift away the growth on their loan, rather than the capital. Full flexibility on the repayment of the loan is retained.
It is not a transfer for Inheritance Tax (IHT) purposes as the capital is loaned rather than gifted.
The loan can be repaid in full on demand or via scheduled repayments, offering a tax-efficient income source. If any of the loan is unpaid on the death of the settlor, the balance is owed to their estate.
The settlor has the option of waiving the loan, though this would be a transfer for IHT purposes.
A loan trust is most effective when set up earlier in life, so that the growth above the loaned amount has many years to compound.
DGT
fixed income
immediate discount for IHT outside of settlors estate
growth outside of estate
can gift over NRB with discount
A Discounted Gift Trust (DGT) enables the settlor to make an Inheritance Tax (IHT) effective gift whilst retaining the right to regular payments of capital during their lifetime.
The value of the future payments back out of the trust (valued via an underwriting process) acts as a discount to the value of the initial gift. This offers an immediate IHT saving as the discounted value of the gift is lower than the capital removed from the estate.
The level of discount would be dependent upon the settlor’s life expectancy and the level of the payments. For example, the longer the settlor is expected to live, the more payments they could expect to receive and consequently, the discount may be larger.
The discount is also important as it will determine the value of the gift for any relevant IHT charges. For example, it could mean that a gift of more than the Nil Rate Band of £325,000 can be made to the DGT, but the discounted value would be £325,000 due to the future income stream and potentially avoid an entry charge.
