Discretionary trust after beneficiary dies: share values

[carolinehs]

Hi there,

I am the trustee of a will Trust described in my Grandfather's will (he died in 1976) for the benefit of my uncle. After our uncle's death our Grandfather's will states that myself and my two brothers should benefit from the Trust. My Grandfather made it clear in his will that only the income from the trust should be used for my uncle's maintenance because he was considered to be "vulnerable" (though specific vulnerability status (VPE1) was apparently not applied to the Trust, although with hindsite it should have been).

My uncle died recently and I am responsible for obtaining probate. The trust is valued at less that the NRB, but more than 150,000, and I understand that I have to fill out an IHT 400.

If this is considered to be a discretionary trust, does his death mean that the shares that are in the Trust are passed on to myself and my brothers at the value on the day of his death? Or will we have to pay capital gains tax if we sell them now taking into account the value that they had when the Trust was set up (i.e. 1976).

Thank you

[pqtaxation]

Did your uncle in his lifetime have the right to, and did, receive all of the income but none of the capital assets?

On his death you write you start to “benefit from the Trust” - do you mean you replace him as the income beneficiaries or are the capital assets to be distributed to you?

[maths]

If the trust is a discretionary trust then the death of your uncle does not itself involve any IHT returns to be made re the trust.

Does the trust not give your uncle the right to the trust income and on his death the trust assets are to be appointed out absolutely to the brothers?

[carolinehs]

Thank you for your responses.

Yes, “maths” is correct. The Trust gave my uncle rights to the trust income, and the Trust assests are appointed out absolutely to my brothers and me.

However, in answer to “pqtaxation’s” question, my uncle did not receive capital, but although he had a right to the income he did not always have all the available income each year, especially after he moved into a nursing home.

[pqtaxation]

1) If this is considered to be a discretionary trust ....
2) … The Trust gave my uncle rights to the trust income, and the Trust assets are appointed out absolutely to my brothers and me.
3) … my uncle did not receive capital, but although he had a right to the income he did not always have all the available income each year, especially after he moved into a nursing home.

You ask in your OP at my 1) extracted above whether it is a discretionary will trust. That should be a question of fact from the wording of your grandfather's will that created the trust in 1976. Do you have that wording? Were the trustees lay or professional professions? .. if the latter they should know.

But what you wrote (as a lay person) in 2) and 3) extracted above makes the trust look an interest in possession (IIP) will trust.

Capital taxes resulting depend on whether it is discretionary (now relevant property) or was a IIP will (not relevant property) trust.

[pqtaxation]

Sorry for my typo and missing in your OP that you wrote you were a trustee.

My comment about trustees in my last post should have read: Were the other trustee(s) lay or professional persons? .. if the latter they should know.

Presumably you replaced your father or your uncle as a trustee at some point since 1976 and you {and the other lay trustee(s)} have never been certain whether the will trust is discretionary or gave your uncle {and possibly your father until his death?} an interest in possession.

[carolinehs]

Yes “pqtaxation” you are correct, my father and grandmother were trustees at the beginning, and when my father died in 2008 my brother and I became trustees (all lay persons). I have asked that bank holding the cash part of the Trust if they have any documentation but it has not been forthcoming. We have been paying tax as if it is a discretionary trust I believe because it has been taxed at the special high rate.

In my Grandfather's will it states "the bank shall hold one half of my residuary estate upon trust to pay or apply the whole or any part of the income thereof to or for the benefit of my son D.S. (my uncle) during his lfe .... and after the death of my said son the bank shall stand possessed of the said half of my residuary estate in trust for my son E. S. (my father who died before my uncle) .... then in trust for the children of my son E.S."

I am actually hoping that it is an interest in possession trust because then I presume that we will inherit the stocks and shares at the value they have on the date of his death. If the Trust is considered to be within my uncle’s estate, the estate will still be below the NRB.

[pqtaxation]

..... my Grandfather's will states "the bank shall hold one half of my residuary estate upon trust to pay or apply the whole or any part of the income thereof to or for the benefit .... then in trust for the children of my son E.S."

The above seems to read that the bank are the trustees of half of your grandfather's residuary estate and your brother and you succeed your uncle and father as only having the interest in possession. How that half residue is to be distributed or whether it falls back into residue is not clear.

I'd suggest you discuss the legal position with the bank trust department or with a trusts and probate solicitor. There is one who regularly posts on this BB under his own name with his contact details - Lee Young at Frettens on south coast (sending him a copy of will should allow a useful phone conversation) - see his post at

http://www.taxationweb.co.uk/forum/worried-about-tennants-in-common-t36669.html#p135004

[carolinehs]

I believe that the bank was one of trustees at first, but I was under the impression that my father and grandmother took this role over at some point. I have tried to contact the trust department at the bank, but they have not shown any keen interest! I will approach a trust and probates solicitor, but in the meantime perhaps you could give me your views on the following:

At this time my biggest question is the tax implications of the two different trust possiblities. If it is an interest-in-possession trust all shares are listed on the IHT 400 and I understand that we inherit them at their value at the time of my uncle’s death.

But, if this is considered to be a discretionary trust, does my uncle’s death mean that the shares that are in the Trust are passed on to myself and my brothers at the value on the day of his death? Or will we have to pay capital gains tax when we sell them using the value that they had when the Trust was set up (i.e. 1976)?

[pqtaxation]

.....At this time my biggest question is the tax implications of the two different trust possiblities...

..If it is an interest-in-possession trust all shares are listed on the IHT 400 and I understand that we inherit them at their value at the time of my uncle’s death.

....But, if it is ........ a discretionary trust, does my uncle’s death mean that the shares that are in the Trust are passed on to myself and my brothers at the value on the day of his death? Or will we have to pay capital gains tax when we sell them using the value that they had when the Trust was set up (i.e. 1976)?

I suggest that your biggest concern at this time should be the correct meaning of the wording in your grandfather’s will, about which you are intending to take professional advice; that wording determines the type of trust and hence its taxation as well as the trustees’ powers, including that to distribute capital to you (and your siblings).

You write that you have acted since you became a trustee in 2008 as though the trust was discretionary.

But, on the other hand, you are now hoping that your uncle had the entire interest in possession because of the uplift benefit for CGT that you describe correctly. However, if your uncle did had not have any interest in possession pre 2006 (and so the assets were relevant property in the parlance since the 2006 legislation) as Maths previously commented in his post above, your uncle’s death does not per se engender any requirement for IHT/CGT returns re the trust and any subsequent distribution of capital to you may result in IHT and/or CGT payable by trustees of a value that will not be affected by his death.