Deed of variation

trance

My father died 18 months ago, and we set up a deed of variation on half of his estate.  We got a financial advisor involved who said this would be a good way to protect the assets (cash no property) for our family line, and also from the money being swallowed by potential care home fees in the future for ourselves (we had to pay extortionate costs for a care home for my father before his death and wanted to avoid the money grab of my dad's hard-earned money.)

We spoke to solicitors, who rewrote our wills so that we are tenants in common, and now a deed or variation has been made, with a Trust registered with the HMRC.

My husband and I are the trustees and also the beneficiaries, and our children are also beneficiaries.  I was led to believe that we can give money to them from the Trust as and when they need it, and also use the Trust money for ourselves, as and when we need it, and we need to keep a record of all money that is taken out of the Trust.

Now I'm reading about a 45% tax on Trust funds - I'm not sure if I'm reading this right?  And that they are not seen as protected money when it comes to care home fees?
A financial advisor and solicitor did not mention this to us.  We are due to receive the money soon after a house sale so we need to set up the Trust account now, if we are going to.

If we decide not to set up a Trust bank account, what do we do?  Can we just treat it as "normal" money and invest it? Where does it leave us that we have set up a deed of variation?

Any advice welcome, please!

Keep_pedalling

Who was the beneficiary who made the DoV to give half of their inheritance away? If it was his wife this was a terrible decision on so many levels.

What sort of trust was created? If it was a discretionary trust then that was another terrible decision. How much are we talking about?

trance

Keep_pedalling said:

Who was the beneficiary who made the DoV to give half of their inheritance away? If it was his wife this was a terrible decision on so many levels.

What sort of trust was created? If it was a discretionary trust then that was another terrible decision. How much are we talking about?

I was the original beneficiary, The original will was split 50/50 between my sister and myself.  The DOV only affects my half.

It's a Will Trust, in my father's name.

Keep_pedalling

trance said:

Keep_pedalling said:

Who was the beneficiary who made the DoV to give half of their inheritance away? If it was his wife this was a terrible decision on so many levels.

What sort of trust was created? If it was a discretionary trust then that was another terrible decision. How much are we talking about?

I was the original beneficiary, The original will was split 50/50 between my sister and myself.  The DOV only affects my half.

It's a Will Trust, in my father's name.

This might have been a good idea to pass on your inheritance to the next generation to reduce your IHT liability but you seem to have created a discretionary trust and all the tax implications that go with such a trust. You need professional advice from a STEP qualified accountant on the trust. 

As for care costs, you should be more concerned about being reliant on a cashed strapped LA to fund your care rather than having to pay for it. 

trance

Keep_pedalling said:

trance said:

Keep_pedalling said:

Who was the beneficiary who made the DoV to give half of their inheritance away? If it was his wife this was a terrible decision on so many levels.

What sort of trust was created? If it was a discretionary trust then that was another terrible decision. How much are we talking about?

I was the original beneficiary, The original will was split 50/50 between my sister and myself.  The DOV only affects my half.

It's a Will Trust, in my father's name.

This might have been a good idea to pass on your inheritance to the next generation to reduce your IHT liability but you seem to have created a discretionary trust and all the tax implications that go with such a trust. You need professional advice from a STEP qualified accountant on the trust. 

As for care costs, you should be more concerned about being reliant on a cashed strapped LA to fund your care rather than having to pay for it. 

I'm hoping we never go into care and that isn't an issue!  Part of the reason for doing this is we wanted to protect the money for our own children, and if they were named as a beneficiary in a Trust then the money is theirs (so if we gave them lump sums, and they bought a house and then split up with partner, the money they'd put in would still be theirs and not split.  That was how it was explained to us.)

It was never explained, by the Later Life Advisor or the Solicitor, that there would be tax implications of the Trust.  We were told that we should put the money into the Trust and then, because as Trustees it is our responsibility to look after it - so to take it out and invest it in a higher earning income account, where we would pay tax on interest;  or give some to the beneficiaries or use it ourselves.  So the Trust would never have money (or much money) in it at all.

It made sense to us at the time, and sounded reasonably simple.

trance

[Deleted User] said:

trance said:

My father died 18 months ago, and we set up a deed of variation on half of his estate.  We got a financial advisor involved who said this would be a good way to protect the assets (cash no property) for our family line, and also from the money being swallowed by potential care home fees in the future for ourselves (we had to pay extortionate costs for a care home for my father before his death and wanted to avoid the money grab of my dad's hard-earned money.)

We spoke to solicitors, who rewrote our wills so that we are tenants in common, and now a deed or variation has been made, with a Trust registered with the HMRC.

My husband and I are the trustees and also the beneficiaries, and our children are also beneficiaries.  I was led to believe that we can give money to them from the Trust as and when they need it, and also use the Trust money for ourselves, as and when we need it, and we need to keep a record of all money that is taken out of the Trust.

Now I'm reading about a 45% tax on Trust funds - I'm not sure if I'm reading this right?  And that they are not seen as protected money when it comes to care home fees?
A financial advisor and solicitor did not mention this to us.  We are due to receive the money soon after a house sale so we need to set up the Trust account now, if we are going to.

If we decide not to set up a Trust bank account, what do we do?  Can we just treat it as "normal" money and invest it? Where does it leave us that we have set up a deed of variation?

Any advice welcome, please!

If you got professionals involved then presumably they would have explained the dos and don's and the tax treatment of your discretionary trust? Or were these just flash salesman who got a commission (see https://archive.is/DjafH)?

It would be very bad form to co-mingle your own property with that of the trusts.  You should be able to get a trust account with metro bank but there are not many other providers around.

The 45% is the normal rate of income tax for a discretionary trust on for most income 45% (39.35% on dividends).  But, as you are a beneficiary, your trust is a settlor-interested discretionary trust and so - among other things - (i) you will pay tax on the trust income via your self-assessment even if you don't receive it, (ii) the other beneficiaries won't get any credit for the tax you pay if income is distributed to them, (iii) the trust will still need to do a self-assessment tax return.  If the trust ever makes a gain, the CGT doesn't quite work the same way as income tax - it depends what happens to assets.  It sounds like you plan to keep the trust for a while and so you also need to understand the IHT rules for relevant property trusts (tenth anniversary IHT charge, exit charge, etc).

If you have not taken independent professional advice then it would be worthwhile doing it and they can help you wind up the trust if you decide it is not really what you want.  

You would have thought that the orofessionals would have mentioned that there are tax implications - to be fair, the Solicitor did say she wasn't a financial advisor, so to speak to one - but we had already (A Later Life Advisor) who we thought we could trust.

We didn't intend to mingle our money or property with the Trust - it was just for the inheritance money from my father.
We were told that what everyone does is to set up the Trust and then take out the money and invest it elsewhere (paying the relevant income tax), or spend it/give some to beneficiaries, as long as we keep track of where it has gone.  My adult children will inherit the Trust and then be able to "forgive" loans  - the example that he used is that if I took £10k out for a holiday in Vegas, and spent all the money on the one arm bandits, they could then discuss whether the money was used wisely, the answer being yes, because I really enjoyed doing it; and the loan is forgiven.  And if we give them money and it is spent on their house or a holiday, then they can forgive the loans as well.

trance

[Deleted User] said:

trance said:

[Deleted User] said:

trance said:

My father died 18 months ago, and we set up a deed of variation on half of his estate.  We got a financial advisor involved who said this would be a good way to protect the assets (cash no property) for our family line, and also from the money being swallowed by potential care home fees in the future for ourselves (we had to pay extortionate costs for a care home for my father before his death and wanted to avoid the money grab of my dad's hard-earned money.)

We spoke to solicitors, who rewrote our wills so that we are tenants in common, and now a deed or variation has been made, with a Trust registered with the HMRC.

My husband and I are the trustees and also the beneficiaries, and our children are also beneficiaries.  I was led to believe that we can give money to them from the Trust as and when they need it, and also use the Trust money for ourselves, as and when we need it, and we need to keep a record of all money that is taken out of the Trust.

Now I'm reading about a 45% tax on Trust funds - I'm not sure if I'm reading this right?  And that they are not seen as protected money when it comes to care home fees?
A financial advisor and solicitor did not mention this to us.  We are due to receive the money soon after a house sale so we need to set up the Trust account now, if we are going to.

If we decide not to set up a Trust bank account, what do we do?  Can we just treat it as "normal" money and invest it? Where does it leave us that we have set up a deed of variation?

Any advice welcome, please!

If you got professionals involved then presumably they would have explained the dos and don's and the tax treatment of your discretionary trust? Or were these just flash salesman who got a commission (see https://archive.is/DjafH)?

It would be very bad form to co-mingle your own property with that of the trusts.  You should be able to get a trust account with metro bank but there are not many other providers around.

The 45% is the normal rate of income tax for a discretionary trust on for most income 45% (39.35% on dividends).  But, as you are a beneficiary, your trust is a settlor-interested discretionary trust and so - among other things - (i) you will pay tax on the trust income via your self-assessment even if you don't receive it, (ii) the other beneficiaries won't get any credit for the tax you pay if income is distributed to them, (iii) the trust will still need to do a self-assessment tax return.  If the trust ever makes a gain, the CGT doesn't quite work the same way as income tax - it depends what happens to assets.  It sounds like you plan to keep the trust for a while and so you also need to understand the IHT rules for relevant property trusts (tenth anniversary IHT charge, exit charge, etc).

If you have not taken independent professional advice then it would be worthwhile doing it and they can help you wind up the trust if you decide it is not really what you want.  

You would have thought that the orofessionals would have mentioned that there are tax implications - to be fair, the Solicitor did say she wasn't a financial advisor, so to speak to one - but we had already (A Later Life Advisor) who we thought we could trust.

We didn't intend to mingle our money or property with the Trust - it was just for the inheritance money from my father.
We were told that what everyone does is to set up the Trust and then take out the money and invest it elsewhere (paying the relevant income tax), or spend it/give some to beneficiaries, as long as we keep track of where it has gone.  My adult children will inherit the Trust and then be able to "forgive" loans  - the example that he used is that if I took £10k out for a holiday in Vegas, and spent all the money on the one arm bandits, they could then discuss whether the money was used wisely, the answer being yes, because I really enjoyed doing it; and the loan is forgiven.  And if we give them money and it is spent on their house or a holiday, then they can forgive the loans as well.

You definitely need to talk to someone who knows their stuff. For example, people don't inherit trusts, it's only a loan if you can show it is a loan, there can be IHT consequences for the trust if a loan is made or the loan is waived, etc. Yes, some people do borrow from a discretionary trust and invest the proceeds personally.

You said "if we gave them lump sums, and they bought a house and then split up with partner, the money they'd put in would still be theirs and not split". That might be a very shortcut way of saying something but how is that different to you having lent the cash (or part owning the house, if that is what the trust is doing)?

We wee told that the beneficiaries would inherit the Trust when we die, and could then list their children as beneficiaries.

Re - giving lump sums, the "loan" we would give them from the Trust was just seen as a way for the money to be used, yet it always has to be given back to the Trust or forgiven. Once given, a loan would never be expected to be paid back. They did say to write Loan notes, so it is official, but that we could get a basic copy off the internet with the specific legal terms requited.

I thought we had talked to people before going ahead with this - a financial advisor and a solicitor, who both said the same thing!  It's frustrating that now I am questioning whether it is the right thing for us.

If we took the money out of the Trust and put it into a building society to gain a better rate on interest, would we still need to pay tax on it as Trust money, or will the tax requirements be sorted at building society level?  I presumed the later, but now wondering whether we would end up paying two lots of tax.

Keep_pedalling

Unfortunately there are some ‘advisers’ out there who are just sales people looking to earn a fat fee on setting up inappropriate trusts.

poseidon1

Seems to me you received truly appalling advice here particularly since you have neither the personal skillset or access to qualified professionals to assist you with what sounds like a complex discretionary trust established via variation of your entitlement under your father's will.

Obviously, your distress at the amount of care home fees your father was liable for pre death informed your decision to do this,  but good to see your sister wisely chose not to follow the same route.

You have not indicated how much is in the trust but if well below the NRB ( the trust has its own nil rate band ),  I would strongly suggest you wind it up either solely in your favour or divide it between your family members as you deem fit.

Absolutely no point going back to the so called professionals that allowed you to go down this route. You now need to find a STEP qualified lawyer to draft the appropriate deed on your behalf. STEP is the Society of Trust and Estate Practitioners, and represents the gold standard in this area of advice. 

On the plus side, if you terminate the trust within 2 years of its deemed creation ( date of your father's death ) there should be no IHT exit charge and you may avoid the necessity of submitting form IHT100 to HMRC reporting termination of the trust.

If you need further convincing note the following:

* Discretionary trust income is liable to income tax at the trust rate of 45%. If investing for capital gains, the trustee CGT exemption is only 50% of the personal allowance ( £1500).

*  Discretionary trusts are liable  to submit 10 year anniversary IHT returns. If the trust value exceeds the nil rate band at that time there is a 6٪ IHT charge on the excess. Any distributions made in the preceding 10 years have to be added back to the trust fund to determine its 10 year value.

* Trustees will be required to prepare formal annual trust accounts if the trust invests in conventional income producing assets.  If they delegate investment management ( which I suspect the 'financial adviser ' maybe steering you towards), the trustees are required to set out their objectives by way of a 'Trustee Investment Policy Statement ''- See link below to article on this

https://www.farrer.co.uk/news-and-insights/trustees-duties-and-powers-when-making-investment-decisions/

* As with most matters when dealing with HMRC there are potential fines for missing filing deadlines and penalties for late payment of liabilities. If you have no knowledge of self assessment, you are particularly unequipped to deal with annual trust tax returns, and employing suitably qualified trust accountants obviously comes at a cost.

Frankly given your naivety of the complexities inherent with Discretionary trust administration and taxation , I really need to stress that you seriously consider terminating before proceeding any further. Fortunately, the monies have not yet been received so you have a window of opportunity to back out of this.

Finally, you might be under the impression that I have a negative opinion of discretionary trusts for family estate and iht planning. On the contrary quite the opposite. Its a horses for courses issue.

 For families with very significant IHT exposure discretionary trusts despite their complexity can have a place. However this is subject to the family  having  ongoing qualified professional advice to assist with administration and compliance to ensure they do not fall foul of the complex fiscal and trust laws which beset these structures. I am also of the view that such trusts really need to be upwards of  £500k in value ( if invested conventionally) to justify the ongoing professional costs if you do not have the competence to do it yourself. 

boingy

Speaking as an unhappy trustee of more than one trust my advice would be to avoid them like the plague. The only people who win are the solicitors, who get to charge a fat four-figure fee each time something changes. A trust can "pass down" through the generations but it costs £££ each time a trustee retires, joins or dies. If I could rewind the clock 20-odd years I'd make a different decision, even though it would have upset my parents.

TheGreenFrog

[Deleted User] said:

 But, as you are a beneficiary, your trust is a settlor-interested discretionary trust 

I have a relative with a similar set-up (total waste of time - although a benefit if the settlor or person agreeing to the variation dies quickly).  My understanding though is that the trust is not settlor-interested as it is set up under will (albeit by variation)?  Some of these trusts also seem to be set up with life interest in the income to the original will beneficiary, which can simplify the tax (especially if you keep the capital in cash).  whehter that is still the case I do not know (the trust of my relative is almost 20 years old)