FAMILY TRUST QUERY

[pdfx4]

Can anyone give me any guidance on this situation please. In simple terms the situation is as follows : -
A grandmother created a maintenance education advancement trust for her 2 grandchildren ("X" and "Y") in 1978. At that time the grandchildren were 3 and 1 years old. The trust fund was to vest in the grandchildren when they reached 35 years but the trustees had power in their discretion to vest any part of the trust fund after the 2 grandchildren reached 21 years..
In 2001 X and Y using the powers given to them under the 1978 Trust Deed appointed the income of the Trust fund to their mother for her lifetime.
Can the mother now, with the agreement of X and Y allow the income in future to be paid to her own 4 grandchildren ?
All parties are in complete agreement.
Or is it a case that the mother by giving up her right to the income and directing the income to the 4 grandchildren this would effectively be an action by their parents (X and Y) ?
X and Y are now 40% taxpayers so the income of the trust fund in their hands would be heavily taxed.
Would this be an effective gift by the mother to her grandchildren or would HMRC consider that the gift (in part) was by X and Y to their own children ?
It is assumed that this would be a gift by the mother of the capital value of the trust fund and she would need to live for 7 years to avoid inheritance tax.
It is assumed that specialist advice would be needed but it would be nice to know in advance that something was possible or whether there was an easier way of achieving the desired result.
If it is likely that there would be unpleasant income tax and capital gains tax implications as well as a potentially exempt transfer then it might be pointless in taking it any further.
Many thanks in advance for any help.

[AGoodman]

As you say, this needs to be considered bya specialist who has a copy of the trust deed in front of them. The sentence, in particular, is very peculiar:

"In 2001 X and Y using the powers given to them under the 1978 Trust Deed appointed the income of the Trust fund to their mother for her lifetime."

A&M Trusts (if that is what it is) would often have wide overriding powers but the power is usually held by the trustees.

Here, you probably could get the income to the settlors' great grandchildren but the method will depend on the precise terms of the trust.

Whatever route you take, any change other than an outright advance to a beneficiary could be a chargeable transfer by the mother. The value of the trust fund in excess of £325k would be subject to 20% IHT. So it's important to get specialist advice.

[pdfx4]

Many thanks for the reply. The 2001 alteration was drafted and settled by a tax expert. Therefore ,although unusual, it has been effective.
From what you say it seems that there are possibilities so it seems worth taking further advice.
However I must admit I had not appreciated that maybe the trust could be altered by the trustees (it is an A and M trust).
I had thought that only the beneficiaries (as they are now full age) could now alter the terms of the trust ? Therefore as they (X and Y) are the parents of the grand children there is the danger that any income directed to the grand children could be taxed as the " top slice" of their parents income. Or am I wrong about this ?

[AGoodman]

Like I said, usually, the trustees of any trust are the ones who exercise overriding powers to appoint or advance assets out. If, as it appears, this trust is different then it needs to be looked at carefully. It is as much a trust question as it is a tax question.

In general, gifts by parents to minor children can result in income arising from the gift being taxable on the parents (under the settlements legislation) but it is impossible to be any more specific with an unusual situation.

[pdfx4]

Thanks very much for your reply and your time and trouble. I will seek more advice but just wanted to have an idea as to whether I was wasting my time.
Many thanks.