Trust Planning Considerations

Question 1

If the executors of an estate don’t have enough cash to pay the IHT bill, can they release the estate.

Answer 1

No, If they don’t have enough cash to pay the IHT bill, they can’t release the estate.

Sometimes this can leave trustees having to take out a short term loan to fund the IHT.

They then use funds in the estate to repay the loan.

Having funds available within a trust, provides access to funds to pay any IHT bill as well as other costs that occur in obtaining probate and settling someone’s affairs on death.

Question 2

Give some examples of where the annual exemption can be used to help mitigate tax

Answer 2

The use of this year’s annual exemption, and last years if it hasn’t yet been used, is a great way to gift away some money.

This can be used as the first part of a larger gift, or even to make contributions to life policies, or pensions. As we saw in the snapshot of the tax tables, special allowances on marriage, and gifts to charities, are other ways to enable a reduction in the estate value.

One point that we made in the last chapter was that regular gifts out of income need to actually be out of real income, and not a withdrawal of capital, such as use of the 5% withdrawals from investment bonds.

For those with a good disposable income, there is much that can be done to minimise the eventual IHT liability, or to fund life cover plans to meet liabilities.

With so many options available, there are some key choices to make regarding when transfers are made, both during the settlor’s lifetime and on death. We need to consider the needs of the settlor, their immediate family and dependents, and their eventual beneficiaries.

Question 3

One of the first choices to make when looking at making transfers out of an estate, is whether to do this during lifetime, or whether it is best to wait until death.

What are the benefits and drawbacks of gifting assets while you are alive?

Answer 3

Can be good for IHT, as the 7 year rule means that the transfer falls out of the estate for IHT purposes.

May also effect financial security during life by reducing available funds / assets

It could be that income is needed from capital during lifetime, although there are packaged plans that can assist with this.

CGT holdover relief can be obtained on transfer into a trust, but this only defers the payment of tax until a future date / a different payer

Trusts allow control

No limits on transfers into bare trusts as not a relevant property trust. After 7 years outside of the estate, however, control will be lost

Question 4

One of the first choices to make when looking at making transfers out of an estate, is whether to do this during lifetime, or whether it is best to wait until death.

What are the benefits and drawbacks of gifting assets until death?

Answer 4

CGT on death is eliminated, so a large gain may best be left until death

Business relief can provide 100% exemption on death, however legislation may change in the future and holdings shares until death may not be commercially desirable.

Business assets, especially in a small family business, may be high risk and have low liquidity.

Spousal exemptions are available and unlimited if both UK domiciled.

The estate value may be below the available NRBs especially as transferability may be available as well as the use of trusts.

Question 5

Give some positive examples of using a Bare Trust

Answer 5

There is no limit to the amount that can be transferred

Transfers into bare trusts are PETs and are not in the relevant property regime

There is no lifetime IHT when setup

After 7 years, the transfer will no longer impact the settlors estate.

If the settlor dies within 7 years, and the gift is more than the NRB, there may be tapering of the tax due

Once gifted, any growth on the assets is outside of the estate

Question 6

Give some negative examples of using a bare Trust

Answer 6

There are CGT consequences for the transfer

If transferred to a spouse, this would be on a no loss no gain basis, to anyone else it is a CGT disposal

To protect the beneficiaries from an unwelcome IHT bill on the settlors death, a gift inter vivos policy may be required.

The gift is an outright gift, so control is lost

if the PET fails, it will be inside the beneficiaries estate, so may use up part of any NRB available.

Question 7

Name some positive of using a DT trust (CLTs)

Answer 7

Popular IHT planning mechanism for transfers up to the available NRB

Good to remove assets from the estate, with flexibility over the choice of beneficiaries.

Any capital appreciation is not chargeable on the donor, so good for those assets most likely to appreciate in value.

CGT holdover relief is available

Question 8

Name some negatives of using a DT trust (CLTs)

Answer 8

Any amount over the available NRB will be subject to lifetime IHT at 20% where the trustee pays, or 25% where the settlor pays.

Capital is given away and cant be used for other purposes.

Subject to periodic and exit charges over the available NRB.

Question 9

Ziva created a DT two years ago for the benefit of her husband, children and grandchildren. Following the sale of her business, she is considering adding to the trust with some or all of the proceeds.

Explain 8 factors that Ziva should take into account before making further gifts into the DT

Answer 9

Does the trust allow additional gifts to be made?

What are the tax implications of of new money going into and exiting the trust?

The purpose of the trust? what is laid out in the trust deed?

The investment strategy of the trust and current market conditions

The circumstances of the current beneficiaries. Are there any new beneficiaries that should be included, two years on since the trust was originally setup.

Can Ziva afford to make the gift? has she considered the level of capital or income she needs following the sale of the business?

Whether a different trust may have been more appropriate. Business relief scheme would likely be more tax efficient, however comes with additional risks.

Would Ziva consider a outright gift to her beneficiaries rather than a trust

Has she maximised her pension previsions or could this be enhanced

Question 10

Is there a correct order when making both PETs and CLTs to gift assets to beneficiaries?

Answer 10

If both PETs and CLTs are being used to gift assets to beneficiaries, the order they are given in has an impact on the amount of IHT paid.

Unfortunately, there is not an ‘always right’ order. It will depend on the amounts involved, and how long a donor lives after the gift is given. The donor’s health at the time of the gift will also be a consideration. 

Question 11

Why would you look to use a DT first when looking to make a series of gifts

Answer 11

As we have mentioned, when giving money out of the estate, the first part of the gift may be covered by the annual exemption.
o If more than one gift is given in the same tax year, it will be the first gift chronologically that will benefit from the exemption.

If the first gift were a PET, and the donor survives for seven years, then using an exemption is effectively wasted.
o The whole gift would never have been chargeable.

o This may be a reason for making the CLT first, as the exemption will reduce the chargeable amount.

A CLT will be subject to the relevant property rules around periodic charging.
o Making a CLT before a PET minimises the tax payable at the 10-year point.

Question 12

A CLT will be subject to the relevant property rules around periodic charging. Making a CLT before a PET minimises the tax payable at the 10-year point.

This is because?

Answer 12

when the 10-year point is reached, the amount of available nil rate band is relevant, and the nil rate band would consider any CLTs or failed PETs in the 7 years prior to the gift

 If the donor had died, then the failed PET would impact, however if the failed PET was after the CLT then this wouldn’t affect the 10-year periodic charge

Question 13

Just to confuse matters, let’s consider a situation where the amount of IHT would be higher if the CLT was made first!

On the settlor’s death, the IHT on a later now-failed PET would have to consider any CLTs in the 7 years prior to the date of the PET, even if this was more than 7 years from the donor’s death.

Why would we need to look at the 7 years prior to a failed PET?

Answer 13

There is only one real way to avoid the situation of one gift affecting another, and that is to ensure that there is more than 7 years left between each gift.

For that reason, the earlier IHT planning can take place, the better This can help give the maximum number of 7-year periods before death

Checking back 14 years will ensure of any used NRB

Question 14

Can trusts be setup on the same day by the same settlor

Answer 14

Trusts set up on the same day by the same settlor cant be set up on the same day

Trusts setup on the same day would be known as related settlements

HMRC will deem that they are in fact the same trust, and add them all together for the purpose of IHT.

This would effectively just give them one NRB

The inheritance tax Act 1984, (IHTA) deemed that whilst each trust has its own NRB the calculation of tax rate has to take into account the value of any other trusts made on the same day

Question 15

If Marco set up 4 trust on the same day for £100,000 each, would the related settlement rules apply?

Answer 15

Yes, this would mean that the four trusts would be added together for the purpose of calculating lifetime IHT on entry and the 10 ear periodic charge.

Applying the standard NRB of £325,000 to the initial £400,000 would mean that £75,000 would be chargeable at 20%.

Therefore, £15,000 lifetime IHT would be paid on entry into the trusts

Question 16

Under the Trustee Act, trustees have wide powers of investments.

What investments can they invest in?

Answer 16

Under the Trustee Act, trustees have wide powers of investments. They can theoretically invest in investment bonds, collective investments, or directly into any of the asset classes, as long as they consider diversification and the needs of the trust.

Question 17

Why are investment bonds are often a preferred choice for trustee investments.

Answer 17

One factor that drives this is simplicity of the taxation of investment bonds within the trust. Trusts are only assessed for income tax when a chargeable event occurs on the investment bond, and investment bonds do not have any CGT implications.

The administration and tax reporting are kept simple, which in turn keeps costs down. This can be less important for large or professionally managed trusts, but for lay trustees it is an important consideration.

The fact that bonds can be assigned both in to and out of trust without triggering a chargeable gain / income tax liability, gives great flexibility to the provision of benefits.

The benefit of the 5% withdrawal rules to create an ‘income’ stream is central to the workings of IHT packaged products.

For simplicity in this guide, we have already referred (quite a few times) to taking an ‘income’ of 5% from an investment bond.

Question 18

Name some other investment considerations that must be factored when choosing a trust

Answer 18

The settlor’s and beneficiaries entitlement to the trust

The type of trust, e.g bare, IIP, discretionary

The ages of the beneficiaries, long term investments may not be suitable in a bare trust for 17 years old’s

The trust management and other expenses

The need for capital or income

*setting up complex arrangements for a small trust scheme will likely not be cost effective, and would go against the trustees’ duties to look after the trust assets for the benefit of the beneficiaries

Question 19

What is a Discounted Gift Trust

Answer 19

A discounted gift trust (DGT) is a special kind of trust arrangement that allows an individual to give away a lump sum of money into trust for the ultimate benefit of their beneficiaries, whilst retaining the right to a fixed level of income for the remainder of their life.

The main aim is to reduce the eventual IHT bill on death, whilst still allowing the donor to receive an income from the gifted assets.

With ‘normal’ trusts, allowing the settlor to retain a benefit from the trust would lead to it being caught by the gift with reservation rules. However, as long as the DGT rules are followed, HMRC have confirmed there will be no gift with reservation.

Question 20

How does a DGT work?

Answer 20

Settlor(s) make a transfer into a trust, and the trustees then invest that money into an investment bond.

The owners of the bond are the trustees.

The trust is usually a discretionary trust, to allow flexibility around apportioning assets to beneficiaries.

The trustees provide the settlor with a regular income, which is funded by making use of the 5% annual withdrawal facility available under the bond. This income is technically withdrawals of capital. 

An actuarial calculation is carried out to determine the capital value of this income stream. Think of it a bit like an annuity that you would take with a pension fund.

The income stream would be fixed for life. It would be underwritten at outset to determine the settlor(s)’ life expectancy, and therefore the amount of the fund that will be paid to them during their lifetime.

Effectively, the underwriter is working out the capital amount that would be needed to provide certain amount of annual income over a specified period.

This value is known as the discount, and the actual level of the discount depends on factors such as the settlor’s age, state of health and the level of income taken.

Question 21

For the purpose of IHT, within a DGT, the discount part of the transfer is deemed to be immediately outside of the estate. After all its gone and the settlor cant get their hands on it.

Would the remainder part of the transfer form part of a CLT?

Answer 21

Yes, the remaining part of a DGT transfer, (value with the discount deduction) would generally be a CLT if a discretionary trust was used. It could technically be a PET if a bare trust wrapper was chosen but that would be unusual as it has implications around potential beneficiaries. In fact, most DGT providers wouldn’t even allow a bare trust.

Any growth on the whole investment would be outside of the estate by virtue of being in a trust

Question 22

In terms of a DGT, what happens with the value of the discount if the settlor dies within 7 years of making the gift?

Answer 22

The exact amount of discount is only relevant if the settlor dies within seven years of creating the trust, otherwise like any other trust it’s value would not be in the estate calculation.

The actual amount of discount is determined by HMRC on death, so the figure provided by the life office is not guaranteed. If full underwriting has been done however, it is likely that HMRC will accept the value.

The fact that the CLT created when a DGT is set up is lower than the whole transfer, means that there is less to go in any cumulation on death. A far bigger initial transfer could be made and invested, as it is only the CLT part that needs to be under the £325,000 nil rate band amount.

The longer the life expectancy and the higher the withdrawals are, the larger the amount of discount that will be available, as there will be larger amount of funds that will be returned to the settlor under the annual income payments.

Question 23

Within a DGT, are the 5% withdrawal of capital allowed and how do they impact the trust?

Answer 23

It is important to remember however that the 5% withdrawals from an investment bond are not actually income payments, but withdrawals from capital. Therefore there will be no income tax implications until at least 100% of the capital has been used.

Based on taking the 5%, it will be 20 years before a chargeable event occurs, and at this time it will be chargeable on the settlor.

Question 24

What happens if the income generated from a DGT is not spent?

Answer 24

To get the maximum benefit from the IHT savings on a DGT, the income that is being paid to the settlor each year should be spent, otherwise there is a risk that this amount is just building back up inside the estate.

Question 25

Are DGT flexible? and can they be revoked?

Answer 25

A downside of a DGT is that, once set up, the plan is relatively inflexible. It is irrevocable once it has been started and the income is switched on, and so it is probably most suitable for older individuals, who definitely need the income but are unlikely to get to the 20-year point and have exhausted the funds.

Question 26

give some positive examples of using a DGT

Answer 26

Can make a gift while retaining an income stream no GWR or POAT rules The discount amount is immediately outside the estate for IHT purposes. The CLT (or PET) is less than the full value of the investment amount,giving an immediate IHT saving. CGT holdover relief is available In a discretionary trust, the investment can exceed the NRB and still avoid periodic and exit charges On death, only the CLT part is taxable, and all funds pass out of the estate The full investment amount is outside of the estate once held for 7 years

Question 27

What are the drawbacks of using a DGT

Answer 27

It is an inflexible plan The income amount is fixed and cannot be changed / non inflation proofed The investment is not efficient for CGT purposes as bonds do not generate capital gains that can utilise any CGT exemptions. The plan is generally unsuitable for those who are younger and are in good health

Question 28

What considerations should you take into account when selecting a DGT for a client

Answer 28

Age and health will effect underwriting Only appropriate if there is an IHT liability that needs mitigating The capital is given away and there must be a need / desire for continuing income The level of income should be considered as to what is needed, bearing in mind once set up the income is fixed. The beneficiaries will only have access after death of the settlor Other gifts within 7 years could impact on the taxation some providers allow these plans to be set up on a single or joint basis. Consideration should be given to what will be best for the individual circumstances.

Question 29

What is a Loan Trust and how is this different from a DGT

Answer 29

Whilst a Discounted Gift Trust passes funds to someone else, a Loan Trust only lends them those funds. This means that a loan trust allows the settlor to retain access to capital, whilst ensuring that any growth on that capital remains outside of their estate for IHT purposes. It effectively creates a line in the sand, stopping the IHT situation getting worse. It is ideal if an individual wishes to cap their potential IHT liability, whilst retaining access to the original capital, as they think they need it in the future. Once again, the settlor transfers money into a trust, but rather than a gift, this is a loan to the trustees. The trustees then invest this money into an investment bond. The trustees may make loan repayments to the settlor, and this generally uses the 5% withdrawal facility on the bond.

Question 30

On death, would the capital of a loan trust be brought back into the estate? and can the settlor demand any capital from the trustees whilst they are alive?

Answer 30

At any time, the settlor can demand any part of their loan back, and on death any remaining loan balance would be called in as part of the estate calculation. The only element of the investment that is truly owned by the trust for the benefit of the beneficiaries is the growth.

Question 31

When transferring assets into a loan trust, would this be classed as a transfer of value?

Answer 31

As no gift has been given, there is no transfer of value for IHT purposes.

Question 32

Are Loan Trusts subject to periodic charges?

Answer 32

There is the potential for a periodic charge at the 10 year anniversary, however this is only calculated on the growth Not the original loan. Therefore the growth would need to be in excess of the then NRB so will only be applicable to relatively large Loan Trusts.

Question 33

What is the main downside to using a loan trust

Answer 33

The downside of this IHT planning tool, is that the tax-saving is very low, limited only to saving any growth on the money going into the estate. In fact, if the settlor were to die in the early years, the saving would be negligible. The benefits can also be negated if any loan repayments received back aren’t spent, as then the value is just transferred back to the estate, and growth would build up on that money within the estate.

Question 34

Name some positives of using a loan trust?

Answer 34

Growth in the value of the assets take place outside the donor's taxable estate Settlor has access to their cash through loan repayments as needed. Income levels aren't fixed and can be adjusted as needed There is flexibility in terms of beneficiaries as under DT

Question 35

Name some negatives of using a loan trust

Answer 35

The outstanding loan remains in the settlors estate for IHT purposes Any loan balance unpaid at the time of the settlors death will form part of the estate If the settlor takes the maximum 5% withdrawals, the loan repayments would stop after 20 years. The tax savings is gradual, and could be negligible if the settlor dies early, as savings are greatly reliant on future investment growth, loan repayments and spending of loan repayments.

Question 36

What are some of the consideration an adviser should take into account when selecting a loan trust

Answer 36

The income stream will stop once the loan has been repaid if taken, the loan repayments should be spent or will accumulate in the settlors estate Trustees can make payments to beneficiaries but shouldn't jeopardise their ability to repay loan if required. The loan balance can be waived. This would be treated as a CLT for IHT purposes. Loans could be made from the trust to beneficiaries, which could be recalled at any time. Any distributions from the trust assets should be careful not to trigger a chargeable event income tax charge on the settlor

Question 37

Ncuti who is 75, is considering investing a lump sum for inheritance tax planning purposes, but is nervous about losing access to his capital. State four advantages and disadvantages of Ncuti using a loan trust compared to discounted gift trust

Answer 37

Advantages Ncuti will still have access to capital of the loan Ncuti could utilise the 5% withdrawal allowance for income. Or take any payments from the loan, flexibly, at any time. The growth of the investments will fall out of Ncuti's estate This would help reduce the potential impact of periodic charges Loan trusts are more flexible than DGT. There is also no underwriting and no restrictions would apply. Disadvantages There is not immediate discount and therefore the full amount of the loan trust will be subject to IHT There is no transfer of value as Ncuti's hasn't made a gift. Loan Trusts can take time to be fully effective for IHT planning as they are reliant on the growth of the investment building up outside of the estate Loans repayments will cease after 20 years if suing the 5% per annum partial surrender withdrawals from the single premium bonds. Any unspent income will accumulate in Ncuti's estate Income is not fixed and not guaranteed The whole investment will not fall out of Ncuti's estate once survived for 7 years

Question 38

Describe briefly a Flexible Reversionary Trust (FRT)

Answer 38

This type of trust allows an individual to make a lifetime gift for IHT purposes to a discretionary trust (so a CLT) whilst retaining an option to enjoy a flexible payment each year.

Question 39

Give some key differences between a FRT and DGT

Answer 39

We used the flexible payment in relation to FRTs. A DGT on the other hand definitely has a fixed income amount using the 5% rules. The settlor, via the trust, invests into a series of single premium endowment policies Each policy can have multiple lives assured The maturity dates of the policies are set up so that they align with the policy anniversaries, and are usually for the first 10 years of the arrangement At each maturity date, trustees can pay the proceeds to the settlor as a chargeable event / fain, or extend the term.

Question 40

With an FRT, can the settlor’s rights can be ‘defeated’ by trustees?

Answer 40

They can surrender any of the policies at any time and pay the proceeds to any of the beneficiaries, even if the settlor is still alive. Alternatively, they may assign policies to the beneficiaries whenever they see fit. Remember though that one of the trustees is likely to be the settlor, so they will have some control over the payments.  Another name for this kind of trust is a revert-to-settlor trust.

Question 41

who are FRTs suitable for?

Answer 41

They are generally suitable for individuals who wish to make a gift from their estate, but also retain the option to be paid some money in future. As we mentioned, the monies that are originally gifted to the FRT are CLTs, as this is generally a discretionary trust. This means that the gift may fall foul of the 7-year rule if the settlor dies within 7 years of making the transfer. This right to receive the maturity proceeds has no value, since the trustees can decide on whether or not to pay this out. HMRC have confirmed that FRTs do not fall foul of either the GWR or POAT rules.

Question 42

Provide some of the positives and negatives of FRTs:

Answer 42

Positives This is a gift for IHT purposes There is a retained option for annual payments if the settlor needs the funds and is going to spend them The full investment amount is outside if the settlors estate if held for 7 years Payment's can be made to the beneficiaries even whilst the settlor is alive Remove future growth from the estate Negatives If the settlor dies within 7 years of making the gift it will be in their estate for IHT purposes Unlike DGTs there is no immediate discount, so limited to a gift under the NRB in order to avoid lifetime IHT at 20% Growth on maturities may have income tax charges Can't have 5% tax deferred withdrawals during the settlors lifetime.

Question 43

Give some considerations an adviser would need to take into account when choosing a FRT

Answer 43

What is the IHT liability that needs mitigating? Other gifts within 7 years could impact on the taxation The capital is given away The level of income should be considered as to what is needed and will be spent Care should be given to selecting Trustees, as they can defeat the settlor's right to the annual payment If all maturities are taken, generally the fund would be exhausted after 10 years

Question 44

What are back to back arrangements

Answer 44

Here, a settlor would purchase an annuity on their own life; a purchase life annuity (PLA). They would also take out a life policy on an own life basis under trust, with the beneficiaries detailed. It is effective for IHT planning as the annuity would have no value on death. The life policy would be out of the estate, as it would be claimed by the trustees, and could be paid straight to the beneficiaries. It can be good for individuals who have an IHT liability and are in good health to move value outside of the estate.

Question 45

How are PLA taxed?

Answer 45

As with all annuities, the cash lump sum used to pay for the annuity would be underwritten to provide an income for life. As it’s a PLA, the capital component of the income would be received tax free, and the remainder taxed as savings income.

Question 46

With a back to back arrangement, who would pay for the life policy premiums and would be these be classed as a CLT?

Answer 46

There would also be the need to pay for the premiums on the life cover. Effectively, with a back to back arrangement it’s some of the income from the PLA that is used to pay the premiums. The life cover premiums would be a CLT if they were not covered by exemptions such as the £3,000 annual exemption or the normal out of income rules. Once the premiums have paid for the life policy, any additional income is available to meet general lifestyle expenditure.

Question 47

With back to back arrangements, Care needs to be taken, as the annuity and life plan cannot be seen to be ‘associated operations’, otherwise they will be treated as a transfer of value for IHT, valued at the lower of:

Answer 47

Purchase price of annuity plus the first premium of the life policy or The sum assured or the value of the greatest benefit that the policy can offer The best way to show that the two elements are unconnected is if they are taken out with separate life offices that aren’t even part of the same group, and both elements are underwritten fully.

Question 48

With back to back arrangements, can the capital component of the PLA be used to pay the premiums for the life cover? 'premiums out of income'

Answer 48

No, because this is effectively a return of capital and not income.

Question 49

Name some of the positives and negatives of back to back arrangements.

Answer 49

Positives Can move larger amounts of capital outside of the estate Annuity pays the life policy premium and provides other income for the settlor Different life office restriction allows individuals to obtain best rates Negatives Individual would need to be in good health due to underwriting Inflexible arrangement if there were a change of circumstances There needs to be a cash lump sum available to purchase the annuity and pay the first premium of the policy. Interest content of the annuity is taxed as interest / savings income

Question 50

Back to Back Damien is considering investing a lump sum to help with the potential IHT liability on his estate. He has been looking at a 'back to back' arrangement Explain to Damien how a back to back arrangement works

Answer 50

Damien would invest a lump sum into a PLA on his own life he would also take out a WOL on his own life under trust He would need to be medically underwritten for both policies The policies should be taken out with separate life offices, which weren't part of the same group, so that HMRC wouldn't class them as being associated operations To be effective, Damien would need to be accepted through the underwriting process. The PLA would pay income Part or all of the income can be used to pay for the life policy premiums (not the capital) Any surplus income can be used to support Damien's lifestyle costs Part of the PLA income is deemed return of capital and paid tax free, the rest would be treated as savings income and taxable. When Damien dies, the annuity will cease and will have no transfer of value for IHT purposes. As the life policy is in trust, the policy will pay out to the beneficiaries. The Trustees can use the claim proceeds to pay any inheritance due on Damien's estate, or distribute to the beneficiaries of the trust. the WOL plan may be a qualifying policy and therefore not give rise to an income tax liability on Damien's death The policy would not be liable itself to IHT as it is held in trust, and is not paid into Damien's estate

Question 51

Who must pay the IHT payable on a failed PET

Answer 51

Recipient of the gift IHT may be due on the gift that they received prior to the death of the donor If the original gift had been cash, the recipient may already have spent the money or tied it up in an asset like a house by the time the bill becomes payable.

Question 52

How can the executors of an estate pay for a IHT bill?

Answer 52

The executors can't use assets within the estate to pay the bill, as these are only released once HMRC have received their payment. Will that mean they have to go 'cap in hand' to a bank and request a loan?

Question 53

If we use a life policy to cover a IHT bill, should this be held in trust?

Answer 53

Yes, A key part of any life insurance policy is that it must be held in trust. That was, it is received by the beneficiary facing the bill, rather than being paid into the estate and compounding the problem.

Question 54

How can you protect against the loss of the NRB?

Answer 54

When gifts have been given, for the next 7 years the cumulative value of these PETs and CLTs will be set against the nil rate band. This means that until they ‘drop out of the cumulation’, the gifts will use up part of the NRB, leaving less available to the estate. The estate will therefore have a higher amount of IHT to pay on the amount of lost NRB, so up to a potential £325,000 x 40% = £130,000. This increased liability will be constant until the gift moves out of the cumulation process, so the value of the CLT x 40% for 7 years from the date of the gift. This extra tax liability could be met by taking out a 7-year level term policy for 40% of the CLT or PET. The beneficiaries of this policy would need to be the personal representatives of the estate, as they are the one faced with the estate tax bill. This would then put us back in the position of artificially restoring the nil rate band. Some people mistakenly think that you could look at a decreasing policy here, just like we did when we considered the tapering of the gift above, but it is the tax that is tapered. The value of the CLT, which is what we are insuring against for the period whilst it uses up some NRB, doesn’t change.

Question 55

Syrah gifts £431,000 to her daughter, having never gifted before. As an absolute gift, this is a PET. Even after this substantial gift, her residual estate is calculated to have an IHT liability on her death. Should Syrah die within a year of making the gift, how would the IHT be calculated?

Answer 55

The value of the transfer is £431,000 - £6,000 (2 years worth of annual exemptions) = £425,000 The element over the NRB is £100,000 (£425,000 - £325,000) The maximum IHT liability will be £100,000 x 40% = £40,000 This bill would be the responsibility of Syrha's daughter as the beneficiary. The amount of tax will taper down from £40,000 to nil, depending on the date of death, between 3 and 7 years. A gift into vivos policy should be set up on a life of another basis, or in trust fore the benefit of Syrah's daughter. The policy should be for £40,000 initially, but automatically tapering in line with the tax due.

Question 56

Syrah gifts £431,000 to her daughter, having never gifted before. As an absolute gift, this is a PET. Even after this substantial gift, her residual estate is calculated to have an IHT liability on her death. Should Syrah die within a year of making the gift, then the PET becomes a failed PET and is set against the available NRB, effectively stealing the NRB from the estate. how would a level term life assurance policy help cover the loss of the NRB?

Answer 56

A level term policy for 7 years for a sum assured of £130,000 should be established in trust. The beneficiaries should be the personal representatives of Syrah's estate. This gives them the additional money needed to settle the increased IT bill during this 7 year period.

Question 57

Who's responsibility is it to review a Trust?

Answer 57

A trust review would often be carried out with the trustees, as they are the legal owners of the trust property. After all, if changes to investments were needed then they would be the ones to do this.

Question 58

How would the death of a trustee prompt a review of the trust?

Answer 58

The death of a trustee shouldn't affect the trust property, but it could create practical issues, as a new trustee will need appointing.

Question 59

How would the death of a beneficiary prompt a review of the trust?

Answer 59

Trust documentation would need to be reviewed The other beneficiaries could now inherit more, or their share could pass in accordance with the beneficiaries' will / intestacy Take care if this was a pre 22 March 2006 or IPDI Trust, as the value of the trust would be added to the rest of the beneficiary's estate when calculating IHT due on their estate.

Question 60

How would the death of a lives assured prompt a review of the trust?

Answer 60

Trustees could need to make a claim on a policy, and will receive the policy proceeds. They should investigate IHT position before distribution

Question 61

How would the serious illness of a settlor prompt a review of the trust?

Answer 61

Although this wouldn't automatically affect a beneficiary's entitlement, the likelihood of death should be considered

Question 62

If a Trustee started to suffer with Mental Health problems, would might this affect the trust?

Answer 62

A trustee could resign if they still had mental capacity Under Trustee Act 1925 the trustee could be replaced if an LPA is in place, they cant act in Trustee capacity

Question 63

If a Trustee declared bankruptcy, would might this affect the trust?

Answer 63

Trustees would generally be expected to retire Trustees must retire if this is a pension or charitable trust Settlors affected only if trust set up to defraud creditors, although statutory trusts would be protected Beneficiaries may need trustees to protect their money, by either helping those in financial difficulty or not distributing the if it would pass to the trustee in bankruptcy.

Question 64

How would a change in marital status affect a trust?

Answer 64

This may result in a change to the beneficiaries, perhaps adding in a beneficiary's spousal or civil partner. A separation may mean that it is not appropriate to continue a beneficiary On divorce, the courts have the power to vary trusts under the Matrimonial Clauses Act 1973 to ensure the rights of ex-spouses and children. Trust assets would generally be considered when arriving at the financial settlement.

Question 65

How would any changes to income or health of a Settlor, affect a trust?

Answer 65

There could be additional amounts that could be gifted to either an existing or new trust Income changes may result in the need for more or less income Income of the trust may have increased or reduced, and affected distributions to the beneficiaries. The beneficiary's economic situation may have changed, resulting in changing needs. Each beneficiary's financial circumstances can vary. Should they all be treated same or should the provision vary?

Question 66

How could dispute between parties of the trust prompt a review of the trust

Answer 66

These are more likely to occur with DT, since trustees can exercise their powers of discretion Fund performance can cause issues How the trustees are performing their duties, in line with the law and trust deed. General family disputes, especially if there seems to be unfair or unequal treatment of beneficiaries. Mediation is generally preferable to costly litigation Could Saunders v Vautier rules bring a trust to an end?

Question 67

How could economic and legislation changes prompt a review of a trust?

Answer 67

General market conditions could prompt reviews of the trust property under the statutory duty of care of the Trustee Act 2000 Suitable advice should be obtained Tax changes should be factored in

Question 68

State 8 events that could prompt the review of a trust for the benefit of a minor

Answer 68

Beneficiary reaches the age of majority, and is entitled to the trust property A change of circumstances for the beneficiary such as death, serious illness, or marriage. Economic or legislative changes Investment performance, comparison against a benchmark The beneficiary needing access to their income or capital If the current investment strategy is no longer appropriate A change to the beneficiary's capacity for loss The need to pay fees or charges or any benefits from the trust property Change of circumstances for the trustees such as death, bankruptcy, mental illness retirement. Death of a settlor

Question 69

If the beneficiary's of a DT are unhappy about the amount of income that is being paid to them from a trust, what steps need to be taken by the trustees in regard to the beneficiaries concerns?

Answer 69

The trustees should review the trust The should see if there are specific provisions set out for dispute resolution They should review the investment performance of the trust They should reconcile the income received against the distributions made to the beneficiaries

Question 70

List the principle factors to consider when selecting an investment for a trust?

Answer 70

What type of trust is being used? What are the tax implications of the trust? What are the beneficiaries ages, timescales and entitlements? The trust management expenses and costs? What is the need for income and capital and the trust's objectives? What are the risk profiles of the beneficiaries? The provisions of the trust deed The Trustee Act 2000 What are the economic conditions? The amount available to invest What is the historic fund performance of the investments? Whether the parties to the trust have any specific ethical investment requirements

Question 71

Briefly explain the conditions that HMRC require for the premiums paid into a WOL, written under trust, in order for them to qualify under the normal expenditure exemption

Answer 71

Conditions -They should be regular / habitual -They are made out of income not capital -The gift should not reduce the transferors standard of living -The gifts are made as part of the transferors normal expenditure Types of income -Earned income -Self-employed income -pension income / pension annuity income -dividend income -savings income from cash deposits, fixed interest investments, or purchases life annuity -property income

Question 72

Your client Richard, who is a widower, is concerned about the level of IHT that may be payable on his estate. State six factors that should be considered when deciding if a DGT would be suitable for Richard?

Answer 72

Does he need a fixed level of income Will Richard need access to any of the capital? What is his IHT liability? Richard's health, age, location and if he;s happy to be underwritten The amount available to invest The need to have flexibility of beneficiaries

Question 73

Describe how a FRT operates?

Answer 73

The Settlor makes a CLT gift into a FRT The gift is segmented into a series of endowment policies / investments Each segment has a maturity date, which starts from the first anniversary of the policy, and are usually spread over a 10 year period The trustees have the power to decide whether to let the endowment policies mature if the trustees do not 'defeat' the maturity, the proceeds will be paid to the settlor If the trustees 'defeat' the maturity, then the maturity date is extended to a later date all trustees have the power to defeat maturities, and the settlors right to receive maturities has no value Because the extension option is exercised by the trustees, any extensions are not treated as new gifts by the settlor Trustees have the power to surrender endowment policies / investments at any time, which can be paid out by the trustees to beneficiaries whist the settlor is alive or after death. Alternatively, they can assign endowment policies/ investments to the beneficiaries. A discount is not available on the gift as it is not possible to quantify any withdrawal the settlor may receive. There are no GWR or POAT issues as the settlor cannot benefit from the rights gifted The original gift is outside of the settlors estate after 7 years

Question 74

State 9 factors that are likely to cause a review of the investment policy of a trust

Answer 74

Changes to legislation or taxation Changes to economic conditions Changes to investment market conditions Changes to the term of the investment Changes affecting the beneficiaries Changes to the objectives of the trust Changes to the performance of the benchmark Changes to the performance of existing investments Changes to the beneficiaries circumstances Changes to the beneficiaries attitude to risk