Discretionary Trust

[Paultry]

I know this could be on the incorrect board, but bear with me.

If a married couple pass away and write a will giving their entire estate valued at around £1.5 million, which included the value of their house, to a single and only child how could inheritance tax be avoided?

I am assuming that £1.0 million would be exempt.

And I assume the tax would then be 40% of £0.5 million.

I ask for advice because it has been suggested (by a solicitor) to set up a Discretionary Trust Fund to mitigate inheritance tax. I have looked at the document from the solicitor, but for me it is entirely incomprehensible.

I just really want to know how useful a discretionary trust fund is. Paul

[tacpot12]

Are you the child or a parent wanting to leave your estate to your child?

Is the solicitor qualified to offer tax advice?

[wanderer]

My understanding is that if each parent sets up a discretionary trust and then survives seven years, the trust sits outside the estate. However, if you are paying a solicitor then they really ought to be explaining their logic to you!

[Bubblesofearth]

I know this could be on the incorrect board, but bear with me.

If a married couple pass away and write a will giving their entire estate valued at around £1.5 million, which included the value of their house, to a single and only child how could inheritance tax be avoided?

I am assuming that £1.0 million would be exempt.

And I assume the tax would then be 40% of £0.5 million.

I ask for advice because it has been suggested (by a solicitor) to set up a Discretionary Trust Fund to mitigate inheritance tax. I have looked at the document from the solicitor, but for me it is entirely incomprehensible.

I just really want to know how useful a discretionary trust fund is. Paul

A discretionary trust does not avoid IHT.

BoE

[Nocton]

I know this could be on the incorrect board, but bear with me.

If a married couple pass away and write a will giving their entire estate valued at around £1.5 million, which included the value of their house, to a single and only child how could inheritance tax be avoided?

I am assuming that £1.0 million would be exempt.

And I assume the tax would then be 40% of £0.5 million.

I ask for advice because it has been suggested (by a solicitor) to set up a Discretionary Trust Fund to mitigate inheritance tax. I have looked at the document from the solicitor, but for me it is entirely incomprehensible.

I just really want to know how useful a discretionary trust fund is. Paul

As has been mentioned, you have to survive 7 years for the gift to the trust to totally avoid IHT. So why not just gift the £500,000 and hopefully survive 7 years? No solicitor involved and very simple. If you need the income from the money, then just invest in solid, dividend-paying AIM shares - there are plenty of them - and then you only have to wait 2 years for the money to avoid IHT.

[scrumpyjack]

I really would avoid a discretionary trust. It will just mean tax, hassle and professional fees.

As has been mentioned I would (and have) just give the money directly to the children/grandchildren. If they are minors, it is simply a bare trust. In my case I just opened accounts for them at HL (my name as trustee a/c grandchild's initials.) All HL needed was confirmation from me that the amount transferred to their accounts was a gift, no trust deed is needed. I then invested the money for them, mainly in ITs. They have their own personal allowance so no tax unless dividends exceed the personal allowance, plus they have their own CGT allowance.

They become entitled to it all when they reach 18.

ps you do need to register the existence of the bare trust with HMRC's Trust Registration System. You do that online and it is pretty simple

[wanderer]

The advantage of a DT versus just "giving the money" is that the donor into the DT retains some degree of control and the money is protected if, for example, there is a divorce between the beneficiary and their spouse.

[Adamski]

I ... I just opened accounts for them at HL (my name as trustee a/c grandchild's initials.) All HL needed was confirmation from me that the amount transfer...

Second that, you can do yourself - set up with HL or another, a bare trust, the assets are held by you as Trustee. But beneficiary gets it after death. Its basically a gift but you retain control over it.

[Adamski]

Point to note, under Labour discretionary trust distributions could be taxed. Is seen as a loophole. Socialists don't like inheritance, and benefits wealthy, so I'd see it as low hanging fruit.

[Kantwebefriends]

I'm open to correction but as far as I can see the widespread belief in the magical anti-IHT character of Trusts is, for most purposes, rubbish.

What lets your assets avoid IHT is giving them away and then surviving seven years. It doesn't matter for IHT whether the beneficiary of your gift is a trust, your son, or Mrs Tiggywinkle.

What the trust does give you is an element of control.

[UnclePhilip]

I'm open to correction but as far as I can see the widespread belief in the magical anti-IHT character of Trusts is, for most purposes, rubbish.

What lets your assets avoid IHT is giving them away and then surviving seven years. It doesn't matter for IHT whether the beneficiary of your gift is a trust, your son, or Mrs Tiggywinkle.

What the trust does give you is an element of control.

This is fine, and gifting (and surviving for the requisite time) is a simpler way of passing assets. However, there are a couple of babies being thrown out with the bathwater here....

Trusts are hugely important for estate planning, which includes, but is not limited to IHT.

Larger estates (particularly the landed gentry) have used trusts for multi-generational planning, avoiding IHT cuts at each generation, while keeping the estate 'in the family'.

Families have used trusts where gifting assets would result in a disabled beneficiary losing access to benefits; useful therefore for benefits and IHT combined purposes.

Trusts have also been useful in limiting the ability of survivors to create extra IHT problems, perhaps unintentionally, which could be avoided.

I know it's quite common to poo poo trusts, but they're a cornerstone of English law which, used wisely, have been enormous wealth protectors.

But each to their own....

[scrumpyjack]

It may be that there are cases where trusts can be useful, but really IMO only when many millions are involved and it is worth the professional fees and admin. Generally trusts have been made severely disadvantageous tax wise, (except for trusts for a vulnerable/disabled person, where they disadvantages have been removed and they get the same status effectively as an individual - ie no advantage, but no disadvantage). There are alternatives if you are talking about a large farming estate but a limited company or partnership may be better.

For £500k I wouldn't do it!

[UnclePhilip]

It may be that there are cases where trusts can be useful, but really IMO only when many millions are involved and it is worth the professional fees and admin. Generally trusts have been made severely disadvantageous tax wise, (except for trusts for a vulnerable/disabled person, where they disadvantages have been removed and they get the same status effectively as an individual - ie no advantage, but no disadvantage). There are alternatives if you are talking about a large farming estate but a limited company or partnership may be better.

For £500k I wouldn't do it!

OK, a personal anecdote, re a mere £300,000....

An investment property, which when passed on would incur a £120,000 IHT charge (40% and well above the £1m NRBs and RNRBs).

Option 1 is transfer by gift to our 3 adult kids, immediate CGT charge then live for 7 years then no IHT. Specific problem: they're not keen being landlords to long existing tenant who's an ancient family friend.

Option 2 is transfer by gift to discretionary trust, CGT either paid or rolled over then live for 7 years then no IHT. Some trust admin, self assessment, beneficiaries claim back IT charges each year.

The point is, we all save £120,000 for some initial fees (hard to share costs as part of comprehensive estate planning) and ongoing admin.

My point is that it's always going to be case specific, but the benefits of trusts can be significant. Actually, make that HUGE....

[Kantwebefriends]

My point is that it's always going to be case specific, but the benefits of trusts can be significant. Actually, make that HUGE....

Very likely, but the advantages are not those that Joe Bloggs assumes, to wit the uncanny ability of a trust to let you avoid IHT.

[Paultry]

Thank you all for the amazing interest and comments that my enquiry evoked.

It is quite clear that for the situation I described a discretionary trust will not in any way mitigate inheritance tax. So far as I can observe it is solicitors who are very keen on trying to convince folk of the presumed benefits of a trust.

Depending on what is decided in the next few months, I will come back to this thread and let you know what the outcome is. Paul

[Bubblesofearth]

OK, a personal anecdote, re a mere £300,000....

An investment property, which when passed on would incur a £120,000 IHT charge (40% and well above the £1m NRBs and RNRBs).

Option 1 is transfer by gift to our 3 adult kids, immediate CGT charge then live for 7 years then no IHT. Specific problem: they're not keen being landlords to long existing tenant who's an ancient family friend.

Option 2 is transfer by gift to discretionary trust, CGT either paid or rolled over then live for 7 years then no IHT. Some trust admin, self assessment, beneficiaries claim back IT charges each year.

The point is, we all save £120,000 for some initial fees (hard to share costs as part of comprehensive estate planning) and ongoing admin.

My point is that it's always going to be case specific, but the benefits of trusts can be significant. Actually, make that HUGE....

£120,000 IHT charge is saved by living 7 years after gifting the property not by transferring to a discretionary trust. ISTM the trust is useful here simply to avoid your kids being landlords? Presumably that duty now falls to the trust, i.e you've introduced a middle manager at no doubt significant cost?


BoE

[Midsmartin]

One other way of trying to avoid some iht is to invest in qualifying AIM listed shares and then not die for two years.

Of course the index of Aim shares has performed notoriously poorly. So depending on your tolerance for risk and enjoyment of share picking, this may not work for you.

Some solid aim shares are often expensive, perhaps for this reason. I hold Thorpe (fw), a company that keeps net cash and performs steadily, but the system price is volatile.

[Dod101]

OK, a personal anecdote, re a mere £300,000....

An investment property, which when passed on would incur a £120,000 IHT charge (40% and well above the £1m NRBs and RNRBs).

Option 1 is transfer by gift to our 3 adult kids, immediate CGT charge then live for 7 years then no IHT. Specific problem: they're not keen being landlords to long existing tenant who's an ancient family friend.

Option 2 is transfer by gift to discretionary trust, CGT either paid or rolled over then live for 7 years then no IHT. Some trust admin, self assessment, beneficiaries claim back IT charges each year.

The point is, we all save £120,000 for some initial fees (hard to share costs as part of comprehensive estate planning) and ongoing admin.

My point is that it's always going to be case specific, but the benefits of trusts can be significant. Actually, make that HUGE....

£120,000 IHT charge is saved by living 7 years after gifting the property not by transferring to a discretionary trust. ISTM the trust is useful here simply to avoid your kids being landlords? Presumably that duty now falls to the trust, i.e you've introduced a middle manager at no doubt significant cost?


BoE

And somebody has to administer the trust. If not the adult kids, then presumably a professional whose fees will soon mount up and somebody needs to be the trustee(s). Trusts in my experience are a great way to keep solicitors and the like in business but unless you are landed gentry, they just suck out money from the assets. And in fact even if you are landed gentry they will still cost but at least they allow an estate to survive almost indefinitely rather than have to be broken up on the death of the proprietor. I know of a few estates near where I live which have become trusts for that very reason, provided of course that they are income producing so as to be able to meet the various costs involved in running the trust.

Dod

[RockRabbit]

It may be that there are cases where trusts can be useful, but really IMO only when many millions are involved and it is worth the professional fees and admin. Generally trusts have been made severely disadvantageous tax wise, (except for trusts for a vulnerable/disabled person, where they disadvantages have been removed and they get the same status effectively as an individual - ie no advantage, but no disadvantage). There are alternatives if you are talking about a large farming estate but a limited company or partnership may be better.

For £500k I wouldn't do it!

OK, a personal anecdote, re a mere £300,000....

An investment property, which when passed on would incur a £120,000 IHT charge (40% and well above the £1m NRBs and RNRBs).

Option 1 is transfer by gift to our 3 adult kids, immediate CGT charge then live for 7 years then no IHT. Specific problem: they're not keen being landlords to long existing tenant who's an ancient family friend.

Option 2 is transfer by gift to discretionary trust, CGT either paid or rolled over then live for 7 years then no IHT. Some trust admin, self assessment, beneficiaries claim back IT charges each year.

The point is, we all save £120,000 for some initial fees (hard to share costs as part of comprehensive estate planning) and ongoing admin.

My point is that it's always going to be case specific, but the benefits of trusts can be significant. Actually, make that HUGE....

IMO, option 2 is financially pointless. Much of the property income will likely end up being used to administer the trust and pay the (increased) tax burden. Your kids will probably still eventually end up being landlords but with a complicated legal and tax structure in place or they will want to get the trust terminated - this is often an expensive and slow process in practice, if not in theory.