Trusts

Using Trusts

There are a number of different trust arrangements that can be used to help with IHT planning offering a number of different solutions

Discretionary Trust

Trustees of a discretionary trust generally have 'discretion' over how income and capital will be distributed from the trust fund, when it will be distributed and to whom. There will normally be a number of potential beneficiaries of the trust and it will be up to the trustees to decide how the funds are allocated and when. Any gifts into a discretionary trust are classed as chargeable lifetime transfers.

Bare Trust

A bare trust (or simple trust) is one in which each beneficiary has an immediate and absolute right to income and capital from the trust. The beneficiaries have the right to take actual possession of the trust. Once the beneficiaries of the trust have been chosen, they cannot be altered at any time in the future. Any gifts into a bare trust are classed as potentially exempt transfers.

Accumulation & Maintenance Trust

An Accumulation & Maintenance Trust is a type of discretionary trust designed to be for the benefit of children up to the age of 25. The trustees have discretion over how and when capital and income are distributed to beneficiaries, but beneficiaries must become legally entitled to the income and capital of the trust no later than age 25.
Interest in Possession Trust

An interest in possession trust has 2 types of beneficiaries, a life tenant, who will have a right to receive any income created by the trust, but will not have access to the trust property, and remaindermen, who will receive the trust capital, usually when the life tenant dies. On their death, the capital value of the trust is treated as part of the life tenant’s estate for IHT purposes.
This type of trust would be appropriate for a client wanting to leave income from a trust to their spouse, but for the trust capital to pass to their children when the spouse dies.

Loan Trust

Loan Trusts are a useful inheritance tax planning tool as any growth on investments held within the trust is outside the investor’s estate, but they retain access to the capital invested. This is particularly attractive for clients who wish to carry out some form of IHT planning but are unable or unwilling to gift money away.

The first step in this process is to set up the trust and appoint trustees, this can be done via a discretionary trust or a bare trust. Then the client makes an interest free loan to the trust, and this money is invested, usually into a bond. The loan remains part of the client’s estate, and they can access this money at anytime, either by way of regular withdrawals or taking lump sums. Any growth on the investment is outside the client’s estate and is held in the trust for the benefit of the beneficiaries.

A loan trust is often set up on a joint life basis with the settlor and a younger life assured. This then gives the flexibility for the plan to remain in force following the settlor’s death.

Because the loan trust involves making a loan to a trust rather than making a gift, placing the plan in a discretionary trust would not need to be considered as a chargeable lifetime transfer for any tax being due at outset, but the plan may be subject to the 10 year periodic charges or exit charges depending on the value of the trust and any other gifts the settlor may have made.

Discounted Gift Trust

A discounted gift trust allows clients to reduce the value of their estate immediately, make a gift, which will be outside the estate after 7 years, and receive a fixed level of income for life (or until the fund has been exhausted).

The plan consists of an investment bond being written under trust and when the discounted gift trust is established, there is an immediate reduction in the value of the clients estate, the size of the reduction is dependent on the level of income being taken. This is because when the trust is set up it is notionally split into 2 parts, one part is the gift (either a PET or CLT depending on the type of trust used) and the other part is effectively the settlor’s fund, which provides the discount from IHT as this part of the fund is used to provide the regular income. The settlor’s part of the fund remains part of their estate, but on death it has no value.

A discounted gift trust can be arranged under either a discretionary trust or a bare trust.

Gift Trust

It is also possible to make a gift via a trust by investing money into an investment such as a bond, and placing it under trust. Different types of trust can be used, such as discretionary trusts or bare trusts, and the inheritance tax treatment would be different depending on the type of trust chosen, but in either case, if the settlor survives 7 years the full value of the gift will be outside their estate for IHT purposes.

Bypass Trust

The purpose of a bypass trust is to allow lump sum death benefits from pension schemes to be held for the benefit of the member’s family with no IHT implications.

Lump sum death benefits from a pension scheme are paid free from IHT, but if a scheme pays a lump sum death benefit to a surviving spouse then this sum will be included in her estate for IHT purposes on her death. The money can, instead be placed into a bypass trust, which is a discretionary trust, for the benefit of the surviving spouse and other members of the family. The spouse will continue to have access to the fund if needed, but on their death, it will not form part of their estate.