Cost of setting up a Discretionary Trust

by **lectric** on Mon Jan 02, 2012 9:33 pm

Hi everyone
I recently finished obtaining probate for my wife's estate without the aid of a solicitor. In her will there is a discretionaryTrust to be set up including her half of our house and the remaining value up to the current nrb of £325,00. Can anyone tell me approximately how much a solicitor would charge to carry this out. Is there any way of doing this simply by writing an IOU as I was led to believe when we first set up our wills? Is this a task that just has to be done by a legal person?
Any guidelines that you can give me will be useful.
Thanks
Lectric

by **section 44** on Tue Jan 03, 2012 2:45 pm

lectric wrote:Is this a task that just has to be done by a legal person?

In the strict sense yes although if by legal person you actually mean a legally qualified person such as a solicitor then no.

lectric wrote:Is there any way of doing this simply by writing an IOU

Can you expand on how this would work?

by **tax_schmax** on Tue Jan 03, 2012 6:25 pm

My advice would be to shop around. The instrument itself could be very inexpensive. The advice that goes alongside it should cost a proportionate amount of money. You should ask yourself if you think the sums involved are substantial. If you do, you should perhaps budget for 1% of the value of the trust to be invested in getting the settlement correctly structured and to ensure future problems are kept to a minimum. Remember discretionary trusts pay tax at 50% on income or 28% on capital gains. Not getting the structure right can cost an awful lot more. Think of the fee as insurance.

The Trustee Act 2000 compels trustees to obtain and consider professional advice where appropriate. I would suggest that most people would benefit from such advice when establishing trusts. As Section 44 mentions, it does not need to be a lawyer, but they are more regularly asked to draft suitable trusts and have fancy software to speed up the process.

by **lectric** on Wed Jan 04, 2012 1:46 pm

Thank you for your advice and suggestions. I thought that it was possible to set up a Trust with an IOU from myself for the sum involved to be payed back to the Trust out of my estate when I died. This would mean that the investments would carry on in my name, without incurring the 50% tax on income etc. I understand that this would mean that in the event of me needing to go into a care home the money could be used to pay those fees. I would be prepared to take that risk.

by **tax_schmax** on Wed Jan 04, 2012 4:11 pm

It's true what you say, although for this not to look like a sham trust, the trustees should demand some interest. If the trust is not managed with the beneficiaries interests at heart, there is the chance of a potential conflict. As the trustees have discretion over who benefits, you should assume it could be anyone, and that infers that the trust should be managed prudently.

It could be argued that there is no commercial advantage to the trustees undertaking lending without receiving interest, and therefore if HMRC wanted to deem the trust as a sham, they may well have a good case. The Ramsey principle is now entrenched in legislation. This allows a court to look through the steps being taken to see what tax advantage is being achieved and if this is (for want of a better word), fair. It is plain to see that the trustees are earning no interest and the sole objective was to avoid tax. There are more legitimate means to achieve this objective. That is why I said that you should take advice. The Trustee Act compels you to do so and I think you'd be more secure if you took advice. 1% would not be a lot of money in the long term.

by **worden** on Wed Jan 04, 2012 4:24 pm

hi there

Was just reading this post as i had just aked the previous question --- i seem to be in a similar situation.... could not help noticing that u mentioned discretionary trusts pay 28% capital gains --- shouldn't it be 40% ?? ---=incidently if anyone could answer my qestion on tax on loans would be very grateful !!

by **tax_schmax** on Wed Jan 04, 2012 5:26 pm

No it's definitely 28%.

Your loan question has not been answered as your comments are not crystal clear. I'' take a stab at it though as I think I see what you're getting at.

If a trust loans a beneficiary money, the trust should receive interest (at a commercial rate) which will attract tax at 50%. The interest on the loan will be income for the trust and that is the reason for the charge. If you as a beneficiary receive the loan, you receive only capital and the interest or profits you generate are yours and taxed accordingly.

Beware, as in my previous answer, if you undertake steps to avoid tax which are contrived and non commercial, you can expect a challenge from HMRC to be difficult and perhaps costly to defend.

by **Lee Young** on Fri Jan 06, 2012 1:48 pm

As a solicitor who sets up these kind of arrangements our fees for all the paperwork and advice would be in the region of £600 plus VAT.

by **KartRacer** on Sun Feb 12, 2012 3:15 pm

tax_schmax wrote:It's true what you say, although for this not to look like a sham trust, the trustees should demand some interest. If the trust is not managed with the beneficiaries interests at heart, there is the chance of a potential conflict. As the trustees have discretion over who benefits, you should assume it could be anyone, and that infers that the trust should be managed prudently.

Hypothetically, if the value of cash in a discretionary trust was of such a value, that the interest paid to the trust by the beneficiary, was at a level to keep the trust income below the £1000 threshold and thus subject that trust income to 20% tax, would that not be considered prudent.