Income Tax, Discretionary Trusts, Means-Tested Benefits, etc

Running_Hare

I’ll try and be brief. Is there anyone here who is knowledgeable about, or specialises in trusts and taxes? I am about to take on the trusteeship (there are two trustees) of a discretionary trust set up as a ‘will trust’. The two beneficiaries are a young student, currently away at university, and a person with a disability, in receipt of means-tested benefits. Anything in a discretionary trust is, of course, not taken into account for means-tested benefits. The student has a student loan; I’m unsure how this might be affected.

The estate will eventually go to the student, either remaining in trust or not, whichever seems most sensible come the time; the person with disabilities has less of a life expectancy.
In the meantime, and for the foreseeable future, the trustees must protect, manage and get the best from the estate, the best possible income, keep it intact and in good order for the young lad, and as much as possible, mitigate tax for the beneficiaries.

The solicitor has completed the probate process (although there’s more to do) and although we have taken advice from an independent financial advisor regarding the estate, expert second opinions are always welcome.

There is property, which is currently rented out for the time being, and a share portfolio.
Among other things, we need to understand how to best deal with any trust income, which of course, is taxed at quite a high rate. The income is from the property rental and is not nearly enough for two people to live on and certainly, after the income tax, will be considerably less. There is also the portfolio of shares which I should imagine is not attracting much interest at the moment.

As I understand, if income is handed out to the beneficiaries, tax can be reclaimed depending on their tax status. I also seem to remember reading that a disabled persons benefit is not affected if they receive a regular sum from a trust providing it is not used for their disability but for ‘extra’s, like days out, I suppose. Can anyone tell me anything about this?

Apparently, we have a ‘window’ of two years after death to appoint funds out of the trust, after which we will have to pay tax on anything we take out. We’ve been told to think carefully about what to keep in and what to take out of the trust before this window closes. Apparently it’s not a good idea to put money in trust, can anyone expand on this? Also what else could we do with it bearing in mind the statuses of the beneficiaries, i.e. student and disabled person.

The property is in need of refurbishment and I’m thinking we should keep some money back for this; is this possible? Or should we use the rental for this? Bearing in mind tax takes nearly half of an already small sum and I’m looking for ways to mitigate this.

This is a huge learning curve but I can see this inheritance being whittled away by fees, which have already been substantial, if we two trustees don’t get to grips with it ourselves. I’m hoping, once the initial setting up etc is done, we can handle it.

I’m not expecting anyone here to sit and answer all my queries, of course, but anything will be gratefully received. If anyone can recommend any reading for trustees and/or tax or any specialist tax sites, perhaps.
[FONT=&quot]Also, ideas of questions I should be asking my IFA/accountant/solicitor would be useful. [/FONT]

agrinnall

I think you need to see a solicitor, who will be able to establish all of the necessary details with you. It's too complicated for a forum, especially when you have absolutely no idea who is replying to you.

Running_Hare

Thank you. I am already seeing a solicitor, they have done the probate and are advising to a certain extent - also organised my consultation with a financial advisor, etc. But, although they have been useful, I feel that sometimes, professionals are simply filling in the forms and recently, in my own personal experience, they don't always know it all. As I said in my post, a second opinion can't hurt. Maybe someone here might mention something that my advisors haven't.

kidmugsy

Is your solicitor a specialist e.g. a member of STEP?
http://www.step.org

At the very least I'd ask about any special regulations covering the disabled beneficiary: I'm sure I've seen reference to special trusts for such cases.

You could always try your luck at this more specialist forum:
http://www.taxationweb.co.uk/forum/inheritance-tax-iht-trusts-amp-estates-capital-taxes-f8.html

Running_Hare

Thank you for the link. I'm already committed to this solicitor now as they've done most of the work and they drew up the will though I'm not as happy with them as I could be. The will is not a specialist one for a disabled beneficiary.

kidmugsy

Running_Hare wrote: »

The will is not a specialist one for a disabled beneficiary.

I wonder whether it could be altered by Deed of Variation into something more suitable? You could always enquire at taxation web.

xylophone

The Trust is fully discretionary? Neither beneficiary has the absolute right to income or any capital distribution?

You have registered the Trust with HMRC?

https://www.gov.uk/trusts-taxes/trustees-tax-responsibilities

See also https://www.gov.uk/trusts-taxes/beneficiaries-paying-and-reclaiming-tax-on-trusts

http://www.tolleytaxtutor.co.uk/taxtutor/files/subscriber/personal-tax/uk-trusts-and-estates/lectures/1d03.pdf

The above may assist.

As Trustees you should issue a certificate to each beneficiary showing the details of any distribution - this can be used by them in support of any tax reclaim.

http://www.cii.co.uk/knowledge/resources/articles/new-tax-year-for-trusts-trustees-and-beneficiaries/40936

You have indicated that you have professional advisers who should be able to clarify.

It is essential that exact records are kept of all expenditure made by Trustees in respect of maintenance of the trust property.

SeniorSam

This seems to be an old post with no conclusion of action. I hope the Trustees took advice and that included investing into Funds, rather than shares. As such it does not produce 'income' and therefore not taxable. Stated for the benefit of others who did not know this

Sam

kidmugsy

SeniorSam wrote: »

T I hope the Trustees took advice and that included investing into Funds, rather than shares. As such it does not produce 'income' and therefore not taxable. Stated for the benefit of others who did not know this

Sam, do you mean that they should have invested in some particular sort of fund that doesn't pay income (and therefore gives its return as capital gains)?

Can you tell me more, please? It's not insurance bonds that you have in mind, is it?

Newly_retired

Sorry I do not know very much detail, yet my sister who is disabled, benefits from an annual payment from a Trust, set up via my mother’s will. The trust is invested in some sort of fund which has performed very well over the past 16 years, so eventually the ultimate beneficiaries will do well out of it . Meanwhile the income is used to fund extra help in the form of social and practical support for treats and outings for my sister.

This sounds similar to what you need, with an appropriate variation for the student as well.
In my family, Advice was sought from both a financial advisor and a solicitor who both specialise in trusts. Maybe your solicitor is not best placed to advise on this?

SeniorSam

If a Discretionary Trust holds assets that do not produce 'income', then taxation will not raise it's head. The sensible thing would be for Trustees to invest into 'growth' funds so that the assets of the Trust can be maintained but not taxed from the income.

In addition, The Trustees can make 'loans' from the Trust instead of distributing the assets. As such, the loans would be repayable from the deceased estate when they die. At that point, or at any time,the Trustees could appoint additional beneficiaries, which could be very useful and a way to maintain the Trust for it's lifetime.

Sam