Settlor – Trustee – Beneficiary the same persons

[marc02]

A Trust created by a settlor (by Will or Settlor Interest). The Trust has no income only capital assets. At the time the Settlor selected Trustees and Beneficiaries who were the same people.

The assets have been ‘liquidised’ to cash. In advance of the 10 year charge being due, the Trustees would like to terminate the Trust created by the Settlor and divide the Trust Fund to create two or three new Trusts.

The new Trusts would “honour” the same principles as the initial Trust. I understand if the initial Trust gifted the Trust Fund (in whole or part) to other Trusts, those gifts would be treated as if being part of the initial Trust and so for example the 10 year charge would be due.

This mean that the initial Trust would need to vest the Trust Fund to the beneficiary, who would then settle the Fund into the New Trust. To keep the same benefit / setup as the old Trust, the Trustees and Beneficiaries of the New Trust would be the same as the old Trust, but this time, they would ALSO be the settlor.

I don’t think there is any law prohibiting the Trustee, Settlor and Beneficiary from being the same person, but (1) could this cause an issue? (2) Would the integrity of the Trust be helped by including a Trust Protector – with any particular power?

Thank you

[marc02]

Just to add, the settlor transfer of fund to the new trust would of course be at PET, but that point aside..., your thoughts on above please?

[AnthonyR]

The new settlements would not be PETs, but chargeable lifetime transfers. This means that if any of the settlors transfer more than £325,000 each (less any NRB already used for CLTs) into trust then there will be an immediate 20% IHT charge.

In relation to the settlor continuing to benefit, there is no prohibition, but there is significant anti-avoidance in relation to settlor interested trusts which will deem income and gains to be that of the settlor and the transfer is unlikely to be effective for IHT purposes as there is a retention of benefit. Settlor interested trusts are generally very messy and I'd usually recommend against them where possible.

If there is enough value in the trust to warrant planning for the anniversary charge then I would recommend speaking to an adviser who understands and deals with trusts on a regular basis as they are very complex and not something you should DIY.

[AGoodman]

In theory that sounds feasible but I would strongly recommend that you take some professional advice.

Bear in mind that the distributions from the first trust may incur an exit charge for IHT. Even if no tax is payable, there may be IHT returns to complete (generally if the trust value is more than 80% of the nil rate band). Also, the resettlements will not be a PET, they will be a chargeable transfer.

You do not mention the purposes or terms of the trust(s). The new trusts sound like they will be gifts with reservation of benefit so there will be no IHT benefit and the trust will pay any income and capital gains tax at the highest possible rates.

Andrew Goodman
Osborne Clarke LLP

[maths]

Generally, transfers between settlements should be avoided. As pointed out a 10 year charge for IHT is not in any event avoided by such transfers.

An appointment out of the existing trust would possibly precipitate an exit charge for IHT.

You do not indicate what you are trying to achieve and why?

Why were the assets converted into cash?

Are any of the settlor/beneficiaries non-UK resident and/or non-UK domiciled ?

Was the original trust set up in lifetime or by will?

[marc02]

It is predominantly a dual objective (a) to mitigate the 10 year charge if possible and (b) to retain control of the Trust Fund for the benefit of the current named beneficiaries (c) keeping the Trust Fund in a wrapper to protect it and maintain flexibility by the Trustees as to how the fund is used.

It seems from above the fund going out of Trust and into a New Trust in the way described is ok, although a CLT is created.

However, although the New Trust (as is the old one) would be written as a DISCRETIONARY TRUST the reservation of benefit becomes an issue that did not exist before when the settlors were not the Trustees or beneficiaries. Have I understood that right?

(1) To remove this problem I suppose the Trustees could be another person, but if this was done, could the Trust give significant Powers to a Trust Protector (who is the settlor and beneficiary) ie: any use of the Trust Fund or benefits distributed must have the consent of the Trust Protector - or would this be the same reservation of benefit just written differently?

(2) ALTERNATIVELY, the beneficiaries could be named broader eg; rather than naming the beneficiary stating "the spouse, children of X" - since it is a discretionary trust "X" could still benefit if "X" who was also the Trustee decided.

[AGoodman]

The protector and identity of the trustees is a red herring. The reservation of benefit relates only to the settlors and terms of the trust.

If the individuals who will be funding new trusts can benefit from the trusts in any circumstances then there will be a reservation of benefit for IHT and they will likely be assessed to income tax on trust income. The fact the trusts are discretionary, or that they do not in fact benefit, will not prevent this.

[AnthonyR]

As Andrew says, the settlor should not benefit and should not be included in a list of beneficiaries (or if included in a class of beneficiaries they should be specifically excluded). The purposes of a trust are to transfer assets out to the benefit of others. Is the 10 year charge large enough to warrant the loss of tax efficiency, asset protection and additional setup costs of restructuring?

The costs of getting this wrong could be more than simply paying the tax!

[marc02]

Thank you. A good point re cost of the change vs paying the tax!

One quick question, understood the settlor cannot benefit, but what about any minor children of the settlor e.g. Healthcare, schooling, summer schemes, etc. for those children. The benefit would be for the children, but the settlor might have otherwise paid for these if not for the Trust fund availability.

[marc02]

Also likewise wuestion for Settlor spouse e.g. Paying for healthcare for example?