Should i wind up a family trust

[jedi1976]

I am the main beneficiary to a family trust that has about £400,000 invested in bonds and shares and i receive a monthly income from that. My son and 2 grandchildren are also beneficiaries, my son will become the main benficiary when i die.

There are high administrative costs accosiated with the trust (accountant and solicitor as trustees) and mainly for that reason i am looking to wind it up. I would also like to be in control of what i think is my money.

I am not sure if it is financially beneficial to wind up the trust and would like some advice.

My personal assets are:

House - £650,000
Investment Flat £200,000
Savings - £200,000

There are three trustess, myself (70) my solicitor and an accountant. My solicitor has replied to my suggestion of winding the trust up as follows:

" The tax consequences of breaking the trust to some extent would depend on who the trust fund were appointed out to. So, for example, if part of the trust fund was appointed to yourself, which i assume may be necessary in order to remove the trusts loan and to replace the income that you are currently drawing from the trust, then the capital sum would form part of your estate and on your death be subject to inheritance tax in all likely hood at 40%.

The same will apply with any monies given to tom (my son) who would presumably receive at the very least the part of the capital which he is already loaned so that he would not have to repay this.

The granchildren (of which there are 2) i assume would be to young to receive large capital sums and therefore any capital that was to be paid to them would have to be held in trust for them and would be subject to the tax regime if it was held on a contingent basis i.e. subject to their reaching a particular age. If it was given to them outright they would be entitled to receive the capital at 18 which may be thought undesirable. Also if they died prior to 18 and therefore were unable to make a will their parents would inherit and this may or may not acceptable.

If assets were disposed of in order that cash could be distributed then capital gains liability may arise in the trust. It should be possible for assetts to be given out to beneficiaries in kind rather than the trust disposing of them and if this was the case then it may be possible to roll over any gains so that the beneficiaries receive the assets at the same acquisition cost which the trust currently holds them. However this may have the advantage of making available the persoanl capital gains tax allowance of the individual with their individual capital gains tax rate applying rather than the trust rate."

I am not very good at this type of thing and don't really understand the context of his letter (namely the last paragraph) or what the best thing to do is.

I am very close to my son and have no hesitation in doing something together with him. We would like to invest in a property together to rent but not sure if or how the best way to do this might be taking the above into account. As mentioned i already own a flat as well as my main home and my son has his house with about a £130,000 mortage; he also has the loan mentioned above.

Any help or advice of the best thing to do with this trust would be hugely appreciated.

Kind regards

[tax_schmax]

I'd probably not wind the trust up.

If your main concerns are reducing the cost of administration, you should investigate methods of doing this. If you want to be in control of "your" money, you should pursue this also.

You have a duty to obtain and consider advice, but no only from those currently appointed, and it is only to obtain and consider, not take blindly. If the tax returns are simple, an accountant could just prepare these for you and feel free to shop around for a good price, or you could do them yourself. As for legal issues, you could shop around for these also. A word of caution though; It's like insurance. It seems expensive or unnecessary until you need it, and you tend to get what you pay for. However, not shopping around is seldom a good idea.

Your son might be able to help you as a trustee. There is no requirement for a trustee to be a professional.

You could buy a property in the trust, although the rent would attract higher rate tax. The capital appreciation forecast for properties is still negative in real terms according to some commentators and the costs of maintenance can be high also. Properties are an asset worth avoiding from an investment perspective for the time being.

I'd be keen to see what you think of as expensive. If you are able to give an indication of the expenses you face, this would be useful.

[sarnia]

Hello Jedi 1976

I have considerable experience of dealing with trusts both onshore and offshore and it is difficult to comment fully without knowing the full background to the trust and your personal circumstances. From your post it seems to me this is a discretionary trust settled by someone other than yourself and that income is distributed to you each year at the discretion of the trustees. Over the years in addition to income both you and your son have received capital from the trust in the form of loans, presumably interest free.

On the limited facts available I think that the advice you have received from your solicitor is about; the last para. is referring to the fact that if the trust sold assets and made a gain on that sale then it would be liable to capital gains tax. It would be possible for those assets to be distributed themselves (rather than cash from a sale of those assets) which would be a deemed disposal by the trust for tax purposes at market value however there is something called holdover relief which could be claimed such that there is no immediate capital gain and the base cost in the hands of the receipient beneficiary is the same as that for the trust. The annual exemption, for CGT purposes, for an individual is currently £10,600 whereas for a trust it is half this i.e. £5,300. The CGT rate applying to a trust is 28% whereas for an individual it will depend on their personal tax profile but may be only 18%. If they are a higher rate taxpayer then the rate will be the same as for a trust.

There may be inheritance tax consequences of assets being distributed from the trust (so called exit charges) or if they remain in the trust then there will be a charge every 10 years, including the value of the loans. The current value of your estate is approximately £1.05m less the nil rate band (£325,000?) but also the loan from the trust is likely to be deductible; the balance would be exposed to IHT at 40% potentially. So, God forbid, you were to die shortly after having wound up the trust there could well be a further 40% liability on the value of the loan and any other assets that are distributed to you. The same would be true for your son of course.

On balance, as tax schmax suggests, I would have thought it is probably better to keep the trust in place for now and look to appoint your son as trustee and maybe retire one or both of the solicitor and accountant. You could always seek advice from them or anyone else as and when needed. I would suggest however that you keep annual accounts and of course there will be tax compliance needing to be done. I am not sure what charges you are incurring but it is likely that at the moment the advantage of the trust even with the charges are likely to outweigh the tax position of the trust being wound up. WIthout more background and research however it is not possible to be definitive.

Hope this helps rather than confuses.

Sarnia

[sarnia]

Hello again sorry the first sentence of the second para. should have read

"On the limited facts available I think that the advice you have received from your solicitor is about right"

Sarnia

[maths]

Sarnia, I note you state that:

From your post it seems to me this is a discretionary trust

.

Why do you so conclude?

Is it not the case that the post suggests an interest in possession trust as it is stated that:

"i receive a monthly income from that. My son and 2 grandchildren are also beneficiaries, my son will become the main benficiary when i die".

[sarnia]

I guess what I was getting at was that the trust was in the relevant property regime rather than being a pre 2006 IIP or TSI and the solicitor says that any assets taken out of the trust will then form part of Jedi 1976's estate implying that they are not currently in his estate.

Sarnia

[sarnia]

Sorry Jedi 1976 this is probably a bit technical, I said it was difficult to comment fully without all the facts but what we are getting at is that the trust is subject to inheritance tax itself rather than the assets forming part of your estate as they would have if you had an entitlement to income (an interest in possession) under old pre 2006 rules or transitional rules that may have applied upto 2008.

In my efforts to avoid an over technical analysis I am perhaps no explaining myself fully.

Sarnia