Understanding trust suitability

When clients start their estate planning journey, deciding which type of trust suits the client’s need now and in the future is imperative. Ensuring we have the information about their gifting history, values, access, and income requirements as well as who they want their trustees and beneficiaries to be (or importantly, not be) are also key factors when pulling together the client suitability report.

Here, Julia Peake, Technical Manager at Nucleus Financial, looks at some of the trusts available and the consideration needed to factor in when formulating that recommendation.

1. Probate trust

• A settlor interested trust, and so are taxed on the donor/settlor and can be written on an absolute or discretionary basis. Because of this, they are not IHT efficient, but they can add real value on that person’s death.
• The assets are owned by the trustees and not part of the estate, so avoid the probate which can be lengthy depending on the complexity of the estate.
• Trust assets can be easily dealt and potentially money loaned to the legal representatives dealing with the estate to pay for expenses depending on the provisions of the deed.

2. Gift and Loan/ Loan trusts

• For who may be unable or unwilling to make large outright gifts at this time but want to achieve IHT savings.
• Written on a discretionary or absolute basis so the gift (if applicable) will be chargeable lifetime transfer (CLT) or a potentially exempt transfer (PET) and if discretionary, will be subject to the relevant property tax regime and consideration given to the reporting requirements for HMRC.
• The client’s entitlement is to the loan repayments only (due to gift with reservation of benefit rules) which remains inside their estate for IHT purposes, but growth is outside from day one.
• The loan is made interest free and repayable on demand, though care is needed as a full repayment could cause tax consequences.
• The loan can be waived making this a gift (PET or CLT) to the trust or an individual. Consideration given to the type of trust involved as there could be tax consequences for doing this.
• Provision for any outstanding loan should also be considered via the Will.

3. Flexible Reversionary trust

• Involves the settlor transferring a bond or a series of endowment policies into trust and retaining the right to certain benefits.
• The settlor’s retained rights can be defeated or deferred by the trustees. Because of this, the settlor’s retained rights have no open market value, and they make a transfer of value equal to the full sum invested on set up.

4. Discounted gift trusts

• Allows individuals to make an IHT effective gift while retaining access to fixed withdrawals for life/until the fund is depleted. This is fundamental when assessing the suitability as once started cannot waive, alter, or stop these and accumulated withdrawals may reduce the IHT efficiency.
• The gift should be affordable to the clients as they only have access to the “retain rights,” not the rest of the trust fund.
• The gift can provide an immediate IHT saving if a discount is agreed subject to underwriting, so gifts might be over NRB might be achievable.
• The client(s) should be in a good health and under 90 years old at the time of underwriting.
• Growth is outside estate from day 1, gift will be outside after 7 years.
• Can be discretionary or absolute basis, making the gift a CLT or PET. If discretionary, relevant property regime applies and reporting requirements should be considered.
• Can be written on a singular or joint settlor basis. There are pros and cons for each, especially if there is a large age gap/ health differences between the clients and if the clients want access to the fund not just the retained rights, post death.
• Benefits usually cannot be distributed to the beneficiaries until the donor/ settlor’s death.

5. Gift trusts

• Donor/ Settlor gifts a lump sum to the trustees for the benefit or either named or a wide range of classes of beneficiaries.
• The Donor/ Settlor will not have access to any withdrawals or the capital of the trust fund so this need to be affordable.
• Discretionary and absolute versions but the discretionary version will be subject to the relevant property and reporting requirements should be considered.
• Gift outside their estate after 7 years, growth from day 1.

6. Bypass Trust

• The lump sum death benefits from a pension “bypass“ the spouse’s estate and are paid to a trust. The spouse/civil partner could still benefit but it would be outside their estate for IHT purposes.
• Most are discretionary giving trustees’ discretion who benefits when and by how much but be mindful of the relevant property regime, especially if the scheme member dies post age 75.
• The scheme member completes a nomination of wishes asking the pension trustees to consider paying the death benefits to the trust rather than individuals. The trustees have discretion about who to pay death benefits to making them free from IHT if paid within 2 years from death.
• It’s created by a gift (usually exempt) of £10 to the trustees with no other additions to trust until the death benefits.
• After death benefits have been paid, the trustees will need to invest the funds for the benefit of the beneficiaries and take advice where appropriate.

7. Will trust

• Comes into force when the testator dies.
• The will contains the details of the trustees, trust property, how this should be managed and the beneficiaries. Commonly they are either discretionary, interest in possession or an immediate post interest trust and taxation and reporting requirements should be considered.

8. Immediate Post Death Interest trust (IPDI)

• An IIP trust which gives an immediate interest on death of settlor via the Will. Usually gives rights of occupation of a property/ right to income to life tenant during their lifetime and then to the remaindermen on the life tenant’s death.
• Should the life tenant give up their right to the property or income then this will be a PET and will remain in their estate for 7 years.

9. Pensions

• Most pensions are created under a master trust scheme and the fund grows free from income, capital gains and inheritance fax in most cases
• New limits on lump sums and death benefits and annual allowances apply, though beneficiary drawdown designated to income is excluded from new limits.

There are many different types of trust solution which will be suitable for clients to use at various stages of their financial life cycle. Using multiple and several types of trust at along the financial planning journey will add value to client’s financial plans, though the order of gifting and the 7- and 14-year rules be remembered.

It is always best practice to consult with legal and tax professionals to ensure that the implications are fully understood before establishing a trust arrangement as most are irrevocable.

This information is based on our understanding of current legislation, including (but not limited to) FCA, PRA and HMRC regulation. It does not constitute any form of advice. Nucleus will take no responsibility for any loss which may occur as a result of reliance on this information.