Discounted Gift Trust - question about withdrawals

happyshopper

Hello, 

My brother and I are equal beneficiaries of a Discounted Gift Trust set up by our mother with an advisor from St James's Place a few years before she died. My brother, as is entirely his right, has made a number of withdrawals from the trust recently to pay for home improvement projects. I have no issue with this at all. I have not made any withdrawals (yet) myself.

My question is, how do we keep track of the relative value of what remains in the trust? The SJP advisor says just keep track of how much he withdraws (which is easy as we both have to sign a document before it is actioned). To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals. Or am I overthinking it? We both want it to be fair to both of us. 

Many thanks in advance.

hs

dunstonh

My question is, how do we keep track of the relative value of what remains in the trust?

The trustees log it down as a record.

To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals.

you could always take a corresponding amount out when your brother takes his. If you don't need the money, then you can place it in an ISA or pension or whichever wrapper is best for you.

happyshopper

dunstonh said:

My question is, how do we keep track of the relative value of what remains in the trust?

The trustees log it down as a record.

To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals.

you could always take a corresponding amount out when your brother takes his. If you don't need the money, then you can place it in an ISA or pension or whichever wrapper is best for you.

Thanks @dunstonh. We are both the trustees and are keeping a record but perhaps I will do as you suggest and take out the same for simplification. 

hs

dunstonh

Again, why do you need a discretionary trust? 

<sarcastic mode on>
It is SJP.    isn't everything they do put into trust?
<sarcastic mode off>

poseidon1

[Deleted User] said:

happyshopper said:

Hello, 

My brother and I are equal beneficiaries of a Discounted Gift Trust set up by our mother with an advisor from St James's Place a few years before she died. My brother, as is entirely his right, has made a number of withdrawals from the trust recently to pay for home improvement projects. I have no issue with this at all. I have not made any withdrawals (yet) myself.

My question is, how do we keep track of the relative value of what remains in the trust? The SJP advisor says just keep track of how much he withdraws (which is easy as we both have to sign a document before it is actioned). To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals. Or am I overthinking it? We both want it to be fair to both of us. 

Many thanks in advance.

hs

What kind of trust is it?  If it is now an absolute trust (bare trust) then you are beneficially entitled to half the assets.  So if the trust held two dividend bearing shares and one was sold and the proceeds paid to your brother then the other share (plus any dividends paid on it) would be yours and you'd benefit from the growth in value of your share.

If it was a bare trust, why not just end it and put everything into sole names?

If it is a discretionary trust then what dunstonh sounds fairest but it all depends on what the trust deed says.  A discretionary trust also has tax things to think about (eg capital gains tax when things are sold and IHT when things leave the trust).

Again, why do you need a discretionary trust?  It would seem simpler to just distribute the assets out (although unlike a bare trust there could be CGT and IHT doing that).

These DGTs more often than not used insurance company investment bond structures as the underlying investment. Is that the case here?

If so, and depending on how long the bond was in place prior to your mother's death, withdrawals which exceed the cumulative annual 5% over 20 years will eventually give rise to income tax liabilities potentially levied on the trust fund.

If you and your brother are sole beneficiaries, then suggest get current value of the bond, do a notional calculation to add back what has been paid away and then seriously consider terminating the trust by advancing units in the  bond to each of you on an equitable basis ( do not encash it!).

Subsequent encashment of each share of the bond whilst in personal ownership and any income gain arising thereon, would then be by reference to your individual marginal rates of tax, rather than the trust rate of tax which depending on the type of trust could be 45%.

It is as well to note there three primary categories of trust structure that could be implemented here:
 
* Absolute trust where beneficiaries are named and fixed at outset. Such trusts automatically     terminate on death of the Settlor leaving a look through bare trust for the beneficiaries.

* Flexible interest in possession where the named beneficiaries are entitled as of right to income from the continuing trust but the trustees have power to change these income entitled beneficiaries.

* Discretionary trust - where trustees have full discretionary powers over the trust funds and no one has entitlement to anything unless the trustees so determine.


If the trust is indeed discretionary there is  the question of potential iht charge at 6% on the 10th anniversary of its creation. If the first 10 years has yet to elapse, and there was no inheritance tax paid on inception of the trust, then terminating prior to the decennial anniversary should avoid a potential exit iht charge.

I would hope you have access to a qualified  tax adviser with regard to the different areas of tax which could be lying dormant within the DGT  (SJP are not tax advisers). If not would,  strongly advise consulting a STEP qualified accountant ( Society of Trust and Estate Practitioners), as soon as possible. 

 Of course if  you can see conclusively that this was an Absolute Trust from inception, then as indicated above the trust terminated on your mother's death, and you both should have already gone your separate ways.

 I assume your mother died over 7 years after the creation of the trust, otherwise there could have  been an IHT exposure on her death?

happyshopper

[Deleted User] said:

happyshopper said:

Hello, 

My brother and I are equal beneficiaries of a Discounted Gift Trust set up by our mother with an advisor from St James's Place a few years before she died. My brother, as is entirely his right, has made a number of withdrawals from the trust recently to pay for home improvement projects. I have no issue with this at all. I have not made any withdrawals (yet) myself.

My question is, how do we keep track of the relative value of what remains in the trust? The SJP advisor says just keep track of how much he withdraws (which is easy as we both have to sign a document before it is actioned). To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals. Or am I overthinking it? We both want it to be fair to both of us. 

Many thanks in advance.

hs

What kind of trust is it?  If it is now an absolute trust (bare trust) then you are beneficially entitled to half the assets.  So if the trust held two dividend bearing shares and one was sold and the proceeds paid to your brother then the other share (plus any dividends paid on it) would be yours and you'd benefit from the growth in value of your share.

If it was a bare trust, why not just end it and put everything into sole names?

If it is a discretionary trust then what dunstonh sounds fairest but it all depends on what the trust deed says.  A discretionary trust also has tax things to think about (eg capital gains tax when things are sold and IHT when things leave the trust).

Again, why do you need a discretionary trust?  It would seem simpler to just distribute the assets out (although unlike a bare trust there could be CGT and IHT doing that).

Thanks very much. I'm not sure what kind of trust it is other than a 'Discounted Gift Trust', I'll need to find out. It was originally set up for IHT planning.  I was just leaving my share in it as it's doing OK at the moment, but perhaps it makes more sense to close it. The SJP advisor have said there's no tax liabilities in withdrawing, but I suspect I need to double-check that he's right. Thanks to you both! hs

poseidon1

happyshopper said:

[Deleted User] said:

happyshopper said:

Hello, 

My brother and I are equal beneficiaries of a Discounted Gift Trust set up by our mother with an advisor from St James's Place a few years before she died. My brother, as is entirely his right, has made a number of withdrawals from the trust recently to pay for home improvement projects. I have no issue with this at all. I have not made any withdrawals (yet) myself.

My question is, how do we keep track of the relative value of what remains in the trust? The SJP advisor says just keep track of how much he withdraws (which is easy as we both have to sign a document before it is actioned). To me, it seems like the relative value of what remains might change as the value of the trust goes up and down due to changes in the stock market after the withdrawals. Or am I overthinking it? We both want it to be fair to both of us. 

Many thanks in advance.

hs

What kind of trust is it?  If it is now an absolute trust (bare trust) then you are beneficially entitled to half the assets.  So if the trust held two dividend bearing shares and one was sold and the proceeds paid to your brother then the other share (plus any dividends paid on it) would be yours and you'd benefit from the growth in value of your share.

If it was a bare trust, why not just end it and put everything into sole names?

If it is a discretionary trust then what dunstonh sounds fairest but it all depends on what the trust deed says.  A discretionary trust also has tax things to think about (eg capital gains tax when things are sold and IHT when things leave the trust).

Again, why do you need a discretionary trust?  It would seem simpler to just distribute the assets out (although unlike a bare trust there could be CGT and IHT doing that).

Thanks very much. I'm not sure what kind of trust it is other than a 'Discounted Gift Trust', I'll need to find out. It was originally set up for IHT planning.  I was just leaving my share in it as it's doing OK at the moment, but perhaps it makes more sense to close it. The SJP advisor have said there's no tax liabilities in withdrawing, but I suspect I need to double-check that he's right. Thanks to you both! hs

Unless the DGT is now in a non interest bearing current account generating zero investment return or growth, seems nonsensical that there are no potential tax liabilities accruing in the background, even if no immediate tax liabilities on current withdrawals.

Suggest you get a copy of the DGT trust document, current valuation of the trust fund and confirmation of where and how the funds are actually invested. Relying on the SJP advisor's unverified and unsupported reassurance that all is fine would not reassure me!

Your current arrangement could leave you out of pocket if there are deferred tax liabilities lying dormant as a result of your brother's prior withdrawals. You need to ensure the position between you can be equalised, or better still separated in entirety so you have control of your own funds going forward.