Setting up discretionary trusts

UncleK

I posted this previously in the investment forum and got some feedback but mainly on the big picture and less on the details.

We intend to set up discretionary trusts, to take money out of our estate to reduce our IHT liability. Beneficiaries would be our children - we've considered straightforward gifting but we don't think the time is right for that.

Our plan - and advice and critique on all aspects is welcome - is to get a solicitor to draw up the trust deeds and then my wife and I would be the both the Settlors and Trustees. I presume we'd then need a dedicated bank account for each trust. We'd start by transferring our money there. And then the trust would use all of that to buy some tracker EFTs.

There may be some income generated and thus some tax to pay - though not at the beginning as we'd be below the IHT threshold.

1. So, any obvious flaws?

2. Is this reasonable to do oneself or should be getting a decent IFA to do this for us? Advice of the investment forum was leaning towards an IFA but I would like to see if anyone has done it themselves.

3. Any problems/experience with banks and trust accounts?

4. Any issues with investments held by trusts rather than individuals?

5. Anything I have completely missed?

Any thoughts very welcome.

Cheers

Keep_pedalling

Well you already have a bunch of answers on the duplicate thread, coving the tax issues associated with a DT, so I would just ask this.

Your children are in their 20s don’t currently own their own homes, so why would you even consider DT over simple gifts? Your children will be looking for their first home in the not too distant future so why not keep it simple and gift them a substantial sum to their first home either now or when they actually start looking to buy?

A DT is subject to hefty taxation and requires an significant effort by the trustees to manage and unless either of your children is a vulnerable adult or an addict of some kind there is not a single advantage to setting one up.

Keep_pedalling

One more question, are you already using your exemptions? As a couple you can gift £6000 per annum and gifts from excess income ( if you have any). You also have a one off exemption of £5000 each if either of them have up and coming wedding / civil partnership plans.

lr1277

Have you found any brokerages that will allow the DT to be the client?
I did look during covid and didn’t find any. Matters may have moved on now.
My parents had a will that put all assets into a DT and I would have had to manage it.
After doing some research I decided I didn’t want that level of effort. So I persuaded my parents to write new wills where they left everything to each other and the person who died 2nd, their assets would be split between the children. The advantage was that my parents could use the nil rate bands. Also any assets above £1M, the tax wasn’t onerous.
The reason I didn’t want to do the work was partly not wanting to prepare and submit tax returns and there weren’t many if any financial institutions that deal with a DT.
Finally for me any inheritance is a bonus, even after taxes. If my parents spent all their money on whatever they wanted, I wouldn’t begrudge them.
In terms of a bank account for a DT, I have a hazy memory that Cater Allen may do such an account. Their fees are comparable to other banks. The downside is that you need a qualified professional to sign off your application. By qualified professional I mean solicitor, accountant or IFA.
HTH

lr1277

Some costs/actions to consider

For shares that are already owned:
1) finding a brokerage that will have a DT as a client ( this applies whether you already own shares or not).
2) Moving shares from a named individual’s account to a DT account. It might have to be a disposal then a repurchase. There may be CGT to pay on disposal. Shares currently in an ISA, when moved to the DT’s brokerage accounts now become liable for tax. A DT cannot hold an ISA.
3) Have you seen the tax rates for trusts? If memory serves they start at 40%.
4) When moving a property into a DT, there is a cost to changing the ownership at the land registry
5) Not sure about this but there may be stamp duty to pay on change of ownership.
6) Once in the DT, the property becomes liable for CGT when sold as it is no longer the primary residence of the owner. Hence you need a property valuation on the day of transfer into the DT.

That is all I can remember from my research. It is possible I may be wrong about some things. But these reasons were enough to persuade my parents that less tax was payable if they left everything to each other.
And I did tell my parents this was a level of work I didn't want to do so my suggestion was entirely self-serving. But I strongly made the argument about taxation would be lower, less costs overall and the whole situation would be less complicated with my suggestion.

SeniorSam

In your previous post and this one, you have not once replied to those who have responded. Questions and clarification have been asked for, but none given. Is this a genuine case or a student question?

If this is a genuine case and you are seeking information to help you, then more of that would come if you respond and clarify your position. If your combined estate is over the £1,000,000 and you do have surplus capital, then certain steps could be taken depending on your own actual need of that surplus during your lifetime.

Often there is a need to reduce a tax liability, but if your are unsure of your own needs, then caution on the type of action you take is essential.  Some steps can be taken where you can still control the capital and have access to it if really needed, but whilst it is invested, then all growth is outside your estates.

Having been a member of this site for many years, you should have learned a great deal and certainly seen the mention of SJP many times and not in a good light, so why are you considering a company that is tied to their own products and not actually an IFA?

Setting up correctly worded Wills with Trust clauses and strategy would be the first step, Have you already taken this step or if not, what sort of Wills do you presently have.

Are the assets shared equally between you and your wife and can you clarify what your needs may be for your capital to ensure that it is not locked away in Trusts?

Information is the key to guidance. Without it, the members here can not help you as much as they could if you are more open with information. I hope you understand this and will try and help you myself if there is enough information available.

UncleK

Sorry if I am not clear. I thought I did reply to some comments when I posted at 4:14 on 27th and then 5:41 on the other thread so I don't think it's fair to say I have not once responded.
I have absolutely no intention of using SJP and I didn't think I gave the impression I was thinking of using them - fees gave me a nose bleed I think I said. Our estate is well above a million and I can't see us spending all of our money hence the desire to move some out of the estate.
I disagree that wills with trust clauses are what's needed. I think we need to move money out of our estate soon. But based on what I have seen here - plus reading the links posted, discretionary trusts may well not be the answer. Certainly the tax rates but other complications as well.
Sorry If I have been failing to respond post by post. We have wills but will updating them soon. Assets are shared and with everything paid for I can't see us having major expenditure about from usual spending and maybe care home towards the end.
Advice is appreciated even if I am not very good at thanking people for it.
Cheers

SeniorSam

Thank you for that. Sorry if I missed a few replies as I was looking quickly at the other post.

As you have surplus that is not needed, then DGT can be useful as they would help reduce IHT. However, as someone already said, gifting direct to children now can result in an IHT reduction from year 3 onward and after 7 years, its all out of the estate.

Make sure you use your full gifting allowances each year, as this moves £6,000 lump between you and your wife each April and other gifting adds to that. The money can go direct to your children, but could also be building up a Trust fund if you wish. Solicitors can advise you fully on this, but make sure you select a STEP solicitor, who has better qualifications regarding Trusts.

Do not worry about any comments that may arise concerning deprivation of assets. The family can ensure that if needed, god care can be arrange privately and no need to even think about state supported care, which is not of the quality most would wish for.

As to the Wills, try and keep control within the family as far as executors and trustees go. Having professionals involved will certainly take far longer and costs can be rather high, so unless you feel the children will not be able to manage, professionals should be carefully vetted and fees agreed in writing.

Personally, I found that Loan Trusts were more to our liking, as the capital is available if needed, but all the growth is outside the estate and loans could be made by Trustees provided the Trust wording is appropriate.

A good IFA specialist in IHT mitigation may well be worth the cost, ( negotiate fees first) but do be careful about what investments are selected in any investment. The markets have been terrible of late and I am so pleased that I moved a large amount to cash just before the downturn. It has saved a great deal and I can move back into funds again as required. I have never chosen shares as they have far more risk than funds, so think carefully and do your own research before commitment.

Good luck, but let the forum know how you proceed, as it does help others seeking guidance.

UncleK

OK thanks. As I've said elsewhere, gifting is not appropriate right now but it does seem sensible to move funds out of our estate now. We are about to talk to a STEP solicitor, and thanks for points on who does what. Regarding "good IFA specialist" - I guess there's no STEP equivalent type of body for IFAs that focusses on IHT and the like? I guess they should all be taking a holistic view of what's good for the client anyway. We'd be funds and not shares.
Cheers

Daniel54

UncleK said:

OK thanks. As I've said elsewhere, gifting is not appropriate right now but it does seem sensible to move funds out of our estate now. We are about to talk to a STEP solicitor, and thanks for points on who does what. Regarding "good IFA specialist" - I guess there's no STEP equivalent type of body for IFAs that focusses on IHT and the like? I guess they should all be taking a holistic view of what's good for the client anyway. We'd be funds and not shares.
Cheers

You can check with an IFA if they are specifically qualified in trusts and/or estate planning.

A good friend of mine has gone down the trust route and we have not discussed why .I have preferred to give with warm hands and each of my children now have properties worth over £500k ,albeit with large mortgages.This included a DoV on inheritance from my parents

Why do you not just  leave the funds until you feel secure in gifting to your children ?

UncleK

Thanks for this. I'm not set on trusts and indeed still hope to give with warm hands. I could indeed wait but not sure how long it will be until I feel secure about gifting and on my longevity. A trust gets the 7 year clock ticking.