Discertionery Trusts and IHT

[chucks]

I have been looking into how my husband and I can shelter money from potential IHT and read about using a Trust(s) for my two children. I can put in £650k. I am confused though whether I use a Will Trust or a Discretionery Trust. What's the difference between these?

Who is the best person to talk to about doing this? Is an IFA able to advise on tax and is he/she covered if they get it wrong? I've heard stories about bad advice and dread doing anything because of it.

Thank you.
Gabrielle

[maths]

The difference is actually been trusts created in lifetime (so-called inter-vivos trusts) and those created by will (so-called will trusts).

Your options depend upon, inter alia, your age; husband's age; age of children and number; and size of each spouse's estate.

If you were to put in £625K into a lifetime trust for your children an IHT charge of 20% of £300K arises ie £60K. The trust itself then suffers IHT charges every 10 years and when property leaves the trust; the rates (max 6%) are however, well below the 40% applicable on death. Dying within 7 years of creating the trust gives rise to a further 20% charge.

You could set up a so-called lifetime nil rate band discretionary trust which causes no IHT charge up front and limited 10 year and exit charges; this may be attractive if you live for 7 years thereafter.

The options are too many for simple answers to be given.

[pqtaxation]

Hi Gabrielle,

You are asking some very wide questions while giving hardly any information about your family circumstances on which to base any detail in a response that could be of much help to you.

The wording of your post makes it appear to a reader that you have some way to go to gain even a rudimentary understanding of the alternatives and issues involved in estate planning.

My only suggestion is that you either become prepared to invest the time to gen up more on the subjects you mention ahead of seeing professional advisors or if you are not prepared that investment in time go to see advisers in the order, I suggested, in another post at

http://www.taxationweb.co.uk/forum/iht-gosh-probs-loom-must-get-on-my-bike-t34607.html

If you want to invest the time then Wikipedia has explanations of most of the key tools -e.g. discretionary trust at http://en.wikipedia.org/wiki/Discretionary_trust. Note the spelling is discretionary not discretionery (sic). The HMRC website also has lots of useful explanations which obviously are written from their point of view and with their interpretation of the legislation but that is always useful to know; for example on discretionary trust -- http://www.hmrc.gov.uk/trusts/types/discretionary-accum.htm

A discretionary trust is one type of trust that may be created during a creator’s (“settlor’s” in UK trust parlance) lifetime or by their will on their death. A will trust is any type of trust whose constitution is specified in a person’s will and invariably comes into existence on their death (but does not contain value until assets from the deceased’s estate are assigned to the trustees at a later time). So to answer your question very briefly the difference between the two trusts that you ask about concerns type vs timing and they are not directly comparable.

If you believe you can afford to settle £650k into trust(s) for the (exclusive?) benefit of your two minor (?) children currently during the lifetime of your husband and yourself in order (? what is your objective) to remove that value from your two estates (if that is what you mean) then clearly you can afford good, specialist, professional advice on whether you are wise to do so, given your overall current and expected future circumstances, and on how to do so.

[pqtaxation]

Your options depend upon, inter alia, your age; husband's age; age of children and number; and size of each spouse's estate.......

If you were to put in £625K into a lifetime trust for your children an IHT charge of 20% of £300K arises ie £60K.

Hi Gabrielle,

I did not see maths' post before I submitted it as the two of us were preparing our responses to your post simultaneously late last night. M

maths' assumes you (individually) will settle £625k in his post whereas I assume you (plural, covering both you and your husband but acting individually) chose a figure of £650k because you sized it at 2 times current nil rate band of £325k as you knew that would be maximum you (plural) could settle as potentally exempt gifts (PETs) w/o an immediate charge to IHT. With a name like Gabrielle it is just possible you (singular, possibly plural) may not be UK domicile, even though you are UK resident, which could be a factor in your (plural) estate planning.

[chucks]

Thank you Maths and pqtaxation. I fully intend taking professional advice but just wanted to get a basic understanding that using trusts was still an option as I've read that the government is clamping down on ways to not incur IHT.

I am British and my husband and I live in England. Our children's ages are 19 and 21. We are fortunate to have this money that we want to pass onto our children but do not want them to have it now. We have good incomes and are financially secure but appreciate things change so want to retain the option of accessing the money if the need arose. We may let the children have some or all the money whilst we are alive but the main reason is that it is not in our estates when my husband and I die.

I'll follow the links you mentioned and try to get more of a picture of what we might do before making an appointment with an expert.

Thanks again for your time.

Gabrielle
(p.s. my typing is rubbish hence 'discertionery')

[pqtaxation]

Hi Gabrielle

Thanks for clarification of your circumstances.

You face the usual conundrum of wanting to gift (surplus) assets away to children (in order to reduce liability to IHT on your and your husband’s deaths) but retain control over them in case children or their relationships go off the rails (e.g. scenario of child marry spouse unacceptable to you and your child dies leaving everything to spouse who remarries someone even less acceptable) and/or you need the assets back in future because your circumstances have unexpectedly changed.

There’s no easy answer when the IHT threshold is as low as £325k per person in UK except to emigrate to somewhere with a higher threshold (or no estate duty) and sever almost all your ties with UK so as to gain a domicile of choice in your new country of residence.

Most parents end up not emigrating and doing adopting a little of each type of alternative solution – e.g. 1) giving some cash assets away as a PET and hope to live for at least 7 years thereafter, 2) buy a house in kids names as a PET (telling them you might need it back some day and to think of themselves only as custodians learning how to look after and be responsible for property) which they live in while at college or in early jobs (yours are 19 & 21 so might be pertinent)with house deeds under your control so at least they can’t spend the house on drugs, and 3) buy assets of a type that qualify for relief from IHT ( which after it qualifies for relief would have to lose 40% in value for children to be worse off on your deaths compared to paying IHT at that rate). Personally I favour more the latter solution – farm, AIM quoted shares, EIS etc- because I retain total control and am happy to be involved in managing my investment portfolios. Investment residential property is illiquid, you can’t sell a little bit as needed and kids move around and don’t want to feel shackled by property commitments.

The relevant property regime for trusts, after 2006, makes new onshore trusts of only limited value in the case of sensible adult kids.

A good, STEP-qualified solicitor might be good starting point if one did not draft your wills.
Do please come back later and tell us what you decided to do and why to address the conundrum.