Deed of variation

TheGreenFrog

trance said:

  And that they are not seen as protected money when it comes to care home fees?

You may have been reading about cases where people, while living, have put their house into a trust and continued to live there.  My brother-in-law was suggested this (by his financial adviser) as a way of avoiding future care costs - he stayed well clear.  Unsurprisingly, these schemes are under attack by local authorities.  Your trust is very different, it is a will trust (albeit set up under a variation).

TheGreenFrog

[Deleted User] said:

TheGreenFrog said:

[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)? 

If a deed of variation is done properly it comes with an inheritance tax fiction that the variation is done by the deceased.  But that inheritance tax fiction does not extend to income tax.  So if the person who actually made the variation (or their spouse) is a beneficiary then it is settlor-interested for income tax. 

Aha, thanks for clarifying.  That may explain why relative (who did the variation) has a life interest in the income.

eskbanker

trance said:

wanted to avoid the money grab of my dad's hard-earned money

TheGreenFrog said:
Unsurprisingly, these schemes are under attack by local authorities.

Conscious that this is always an emotive topic but surely there's no 'grabbing' or 'attacking' going on here, just local authorities declining to fund care for those who have the means to do so themselves, i.e. taking seriously their legal responsibility to deploy taxpayers' money wisely!

poseidon1

TheGreenFrog said:

[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)

You are correct. Trusts created by variation of the  Will of the deceased are not settlor interested. The deceased is the settlor for all purposes.

However, the trust you mention as being almost  20 years  old would have had different  (and much more favourable ) IHT rules compared to those created on after budget day  22 March 2006.
Pre March 2006 trusts extremely useful from that point of view.

poseidon1

[Deleted User] said:

poseidon1 said:

TheGreenFrog said:

[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)

You are correct. Trusts created by variation of the  Will of the deceased are not settlor interested. The deceased is the settlor for all purposes.

Thanks for that but are you sure you are right? I did start to write a long post explaing the differences between IHT (s142), CGT (s62(6) vs s68C) and IT (e.g. s472 ITA).  I then mentioned Marshall v Kerr and the TRSM manual.  But it got a bit geeky and I doubted if anyone would read it.  So cutting to the chase, I thought s472 ITA 2007 said that the person who had the property immediately before the variation is the settlor "for the purposes of the Income Tax Acts (excepted where the context otherwise requires)". And where as a result of the DOV a discretionary trust comes into existence, there is no other context. Oh, and here is the bit from the TSRM suports this: https://www.gov.uk/hmrc-internal-manuals/trust-registration-service-manual/trsm32040

Where a trust has been established by a Deed of Variation or family arrangement varying a will, each person who took less under the deed than they would have done under the will is a settlor of the amount given up.

As I've mentioned before, I never touched family discretionary trusts and so they are all a bit confusing to me.

Yes, I have to concede ' settlor for all purposes' should have been limited ( in this circumstance) to IHT purposes - see link to a short Trust forum discussion where the highly respected Malcolm Finney's analysis concurs that where no trust existed under the original will provisions, then the settlor is the beneficiary varying their entitlement into a new trust 

https://trustsdiscussionforum.co.uk/t/deed-of-variation-who-is-the-settlor/22450

However, given that after March 2006 the OP's trust remains   burdened with the IHT regime for discretionary (relevant property)  trusts (10 year reporting) , coupled with the complex income tax reporting for settlor interested arrangements, this unholy complex mix of compliance if anything is worse than if it followed the route of a pure discretionary trust for all tax purposes.

 Certainly record keeping, becomes more challenging when addressing the 10 year charge and I maintain the OP and the immediate professionals around her , demonstrably do not have the competency to handle the complexity.  Even more so since the main driver behind this seems to be care home fees avoidance rather than IHT mitigation. 

Indeed given that this technical discussion ( between ourselves) will undoubtedly be beyond the OPs comprehension, this should be a clue to her that this particularly arrangement is wholly unsuitable for her circumstances.

trance

poseidon1 said:

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. 

Sorry for delayed response, I've been ill for the last few days.

The amount of inheritance is well below the inheritance tax limit, and there is no property involved, so I am shocked to hear that once I pay it in (if I have understood all of the above comments correctly) I will pay 45% in tax on it.

The solicitor is a member of STEPS - she was the one who told us we could do our own loan notes and could find ones to print off online and complete.

She also led me to believe that the Trust would pass down - I appreciated that there would have to be solicitors involved in this, so some costs, and I was comfortable with this. But I may be that she was simplifying the process for me, or I totally misunderstood.

The financial advisor told me that the yearly |Trustees meeting would mean that me and my fellow Trustee, my partner, would sit down in our living room with coffee and biscuits, have a chat, and then complete a document to say the meeting had been held.

I am going to contact my solicitor with all the information I have found out from everyone above (thank you!) before I do anything further.

trance

TheGreenFrog said:

trance said:

  And that they are not seen as protected money when it comes to care home fees?

You may have been reading about cases where people, while living, have put their house into a trust and continued to live there.  My brother-in-law was suggested this (by his financial adviser) as a way of avoiding future care costs - he stayed well clear.  Unsurprisingly, these schemes are under attack by local authorities.  Your trust is very different, it is a will trust (albeit set up under a variation).

We were told that the council may see otherwise, which is one of the reasons we went with a solicitor, as we thought it would have more weight and gravitas.  And the financial advisor was CONSIDERABLY more expensive!

trance

eskbanker said:

trance said:

wanted to avoid the money grab of my dad's hard-earned money

TheGreenFrog said:
Unsurprisingly, these schemes are under attack by local authorities.

Conscious that this is always an emotive topic but surely there's no 'grabbing' or 'attacking' going on here, just local authorities declining to fund care for those who have the means to do so themselves, i.e. taking seriously their legal responsibility to deploy taxpayers' money wisely!

I'm sorry, I didn't make it clear what I meant:

I am happy to pay for my care if I ever need to go into a care home, just not happy to pay for my care AND to thickly line the deep pockets of the investors, who do very well from care homes who mournfully state to their captive inmates that fees have to go up steeply to fund the care!

eskbanker

trance said:

eskbanker said:

trance said:

wanted to avoid the money grab of my dad's hard-earned money

TheGreenFrog said:
Unsurprisingly, these schemes are under attack by local authorities.

Conscious that this is always an emotive topic but surely there's no 'grabbing' or 'attacking' going on here, just local authorities declining to fund care for those who have the means to do so themselves, i.e. taking seriously their legal responsibility to deploy taxpayers' money wisely!

I'm sorry, I didn't make it clear what I meant:

I am happy to pay for my care if I ever need to go into a care home, just not happy to pay for my care AND to thickly line the deep pockets of the investors, who do very well from care homes who mournfully state to their captive inmates that fees have to go up steeply to fund the care!

I don't follow - if your beef is with care costs being expensive then using trusts isn't going to enable access to lower costs for you to pay, i.e. the choice is you pay at the going rate or the local authority funds the care?

gm0

@eskbanker - mild risk of going off topic.  You need to do more research before projecting such certainty.  LA capped rates.  Fixed shift minimums (CQC) and % of LA and private self funders in a site interact horribly.  The only practical solution for the care home is a differential pricing tax scheme on private self funders to top off the funding gap left by lagging LA rates (fiscal drag).  Ah these rooms are more expensive you see - sunny aspect - nice view.......it's not open and transparent on the bill - paying 15% of Molly in number 13 - but it's there in the rate.  This rankles. Socialised you say.  Really ?  Then why is this happening ?

I don't believe in magic trusts and am unbothered when creative tax loopholes get closed or taxed to prevent their widespread abuse.  Whether its SDLT evasion (sorry avoidance) or this sort of thing. 

That being said - that changes nothing about what a truly !!!!!! show the current situation is. Nor how urgent it is to create more provision and the ability to empty acute hospital beds into cottage/care home settings with monitoring and some level of nursing home level care and medication.  Still we are having ANOTHER REVIEW - Marvelous.