Discretionary Trust

bigadaj

valueman1 said:

Bigadaj - as they say ‘love is blind’ and 50% of marriages end in divorce. Better to prepare for the worst and hope for the best.  I wouldn’t want my grand children’s inheritance to end up with my son (or daughters) ex.

By creating a structure that specifically excludes the mother of your grandchildren, think of the consequences of that alone. there's a  point at which you need to let go, why not skip your grandchildren and allow your great grandchildren to benefit?
You obviously don't trust others with your wealth even after you are dead.  It would make discussion far more pertinent if there were some idea of the sums involved, your idea of a cheap professional trustee is pie in the sky, you would be looking at tens of thousands in set up costs and ongoing involvement, especially as you now seem to require the ongoing involvement of an accountant and lawyer, very muddled thinking in my opinion.

valueman1

bigadaj said:

valueman1 said:

Bigadaj - as they say ‘love is blind’ and 50% of marriages end in divorce. Better to prepare for the worst and hope for the best.  I wouldn’t want my grand children’s inheritance to end up with my son (or daughters) ex.

By creating a structure that specifically excludes the mother of your grandchildren, think of the consequences of that alone. there's a  point at which you need to let go, why not skip your grandchildren and allow your great grandchildren to benefit?
You obviously don't trust others with your wealth even after you are dead.  It would make discussion far more pertinent if there were some idea of the sums involved, your idea of a cheap professional trustee is pie in the sky, you would be looking at tens of thousands in set up costs and ongoing involvement, especially as you now seem to require the ongoing involvement of an accountant and lawyer, very muddled thinking in my opinion.

I don’t understand your issue with wanting to protect my children and grand children.  Have you any idea of the number of divorced (generally) men who are impoverished by divorce process, indeed it is one of the main reasons for homelessness.

I am asking for suggestions from those with experience not inviting criticism from people without.

valueman1

Take for example the case where my son marries a woman who has an affair.  They divorce and she gets the house and marries her new boyfriend and they have children. My hard won savings are now funding a family of strangers and my son is left with nothing.

Shedman

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

AnotherJoe

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

And you want that to be "low cost"?

<chortle>

valueman1

Shedman said:

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

Thanks for your comments.
Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

I’m inclined to agree that further to the comments on costs and complexities this may not be such a good idea. If I appoint accountants and lawyers the costs would be prohibitive and if I appoint a friend or relative it places a huge burden upon them. There does not appear to be any lower cost advisers who only specialise in trust management and are therefore familiar with the process and dealing with requests for funds day in and day out. That does surprise me given how common these are.

Malthusian

valueman1 said:

I don’t understand your issue with wanting to protect my children and grand children.  Have you any idea of the number of divorced (generally) men who are impoverished by divorce process, indeed it is one of the main reasons for homelessness.

If you are penniless and homeless after a divorce you were penniless and homeless before it.

Councils have a statutory duty to find housing for everyone in their area. Homelessness is a mental health issue, there are literally no homeless men in the UK who have divorce to blame for their situation. Some homeless men blame their ex but some homeless men blame secret government conspiracies.

I am asking for suggestions from those with experience not inviting criticism from people without.

You are mostly rejecting information from people with experience as they aren't telling you what you want to hear. (That you can achieve immortality by using your estate's wealth as a phylactery.)

valueman1 said:

Take for example the case where my son marries a woman who has an affair.  They divorce and she gets the house and marries her new boyfriend and they have children.

As your scenario suggests there are no children when they divorce, she would get half the assets of the marriage if it was long enough for their assets to be intertwined. So she would only get the house if he took away assets of equal value.

Shedman

valueman1 said:

Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

CGT on a trust is chargeable at 20% (28% for residential property) above a £6150 annual allowance.  Not really familiar with CGT for trusts but believe it's payable for example when assets are taken out of the trust (eg selling funds to pay tax) or when beneficiary gets some of the assets (or encashed value) from the trust, and it certainly would be more complicated when using accumulation funds.

The trust for which I am a trustee has an offshore investment bond (which has various funds held within it) as its asset.  This does indeed create its own issues as, although there is no annual income tax and is not subject to CGT, there are onerous tax considerations if any of the bond clusters are encashed within the bond (simplistically 45% for anything above £1k although it is allowable to take 5% of initial premium p.a. as tax deferred over 20 years although this effectively should end up be tax free) as well as IHT exit charges on assets leaving the trust.  Therefore, the most tax efficient way to distribute is usually to assign clusters to beneficiaries and for them to encash them at their marginal rate of tax (so good for non/basic rate tax payers).  Paying any tax due was an issue as no cash was left in the trust originally so some of the 5% had to be used to do that.

On top of this of course, as with all discretionary trusts, there's the 10 year anniversary IHT calculation to perform which is far from straightforward.  To be frank having gone through one 10YA cycle my preference is to try and assign out all of the bond clusters before the next 10YA to avoid the hassle, especially as I'll be knocking on a bit by then.  

Although a beneficiary myself, even taking account of the potential overall tax savings and other potential benefits, I (and more so my better half) do often wish the settlor had just passed the inheritance on in a 'normal' manner even if it was reduced by the IHT at the outset.  So do think long and hard and take some good financial advice (not just a trust solicitor) before going down the trust route.

AnotherJoe

valueman1 said:

Shedman said:

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

Thanks for your comments.
Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

I’m inclined to agree that further to the comments on costs and complexities this may not be such a good idea. If I appoint accountants and lawyers the costs would be prohibitive and if I appoint a friend or relative it places a huge burden upon them. There does not appear to be any lower cost advisers who only specialise in trust management and are therefore familiar with the process and dealing with requests for funds day in and day out. That does surprise me given how common these are.

Most likely the reason is the need to cover themselves against being sued for being too restrictive not restricive enough not investing properly etc etc. Same as we see now with Db -> DC pension transfers where most advisers have stopped doing that busienss, its not worth the costs.

valueman1

AnotherJoe said:

valueman1 said:

Shedman said:

valueman1 said:

Sherman - I would invest in an accumulating global index fund in equities with one of the large providers like Vanguard. It would be onshore. Ideally, one trustee would be an accountant, the other a lawyer, or at least one experienced in acting as a professional trustee and aware of the tax and regulatory issues.

OK.   Not sure if you are aware, but an issue that is likely to arise with using accumulation funds is that there will be 'notional distributions' (dividend income received by the fund added to the fund but not paid out as in Income funds) and which are reportable as income,  as I don't believe that a discretionary trust classifies as being exempt in same way that say ISA or SIPPS are.  This is therefore likely to require an annual trust income tax return which will either require to be prepared manually and submitted on paper return or online using commercial tax software as HMRC doesn't have an online self assessment module for trusts.   (By the way Trust income is taxable at 45% beyond £1000 income p.a. (20% up to £1000) or 38.1% (7.5% to £1000) if dividend income and the tax is payable out of the trust funds, which could mean having to sell some units to cover the tax due, and not from outside the trust otherwise it is regarded as a further addition to the trust)

(A further issue could be Capital Gains Tax on gains within the trust when Investments are sold)

I think the idea of having an trust accountant and a lawyer as Trustees is a noble intent but I doubt that would come cheap.  Unfortunately I fear a lot of trusts are set up with good intent but without the settlor realising the difficulties they create for the trustees (particularly after the settlor is dead).

Thanks for your comments.
Yes, I am aware of the ‘notional distributions’. However, I wasn’t aware of the level of income tax, that is high. Maybe offshore is the way to go but I imagine this would have its own set of issues. Do you have any experience of these? CGT is another consideration. Do you know what the rate is?

I’m inclined to agree that further to the comments on costs and complexities this may not be such a good idea. If I appoint accountants and lawyers the costs would be prohibitive and if I appoint a friend or relative it places a huge burden upon them. There does not appear to be any lower cost advisers who only specialise in trust management and are therefore familiar with the process and dealing with requests for funds day in and day out. That does surprise me given how common these are.

Most likely the reason is the need to cover themselves against being sued for being too restrictive not restricive enough not investing properly etc etc. Same as we see now with Db -> DC pension transfers where most advisers have stopped doing that busienss, its not worth the costs.

Surely they can get PI cover? Presumably if this was your specialism you would know the pitfalls, case law etc. and this would inform your approach.