Discretionary Trust Surrender

aliababa

Asking on behalf of mother in law who’s sole remaining parent just passed.

In summary and without as much commentary as possible:

• remaining parent died in Feb-26 (FY25/26)
• discretionary trust set up 7 years ago
• £33k approx remaining
• Two trustees (both daughters of deceased) are now the beneficiaries and remaining trust fund is to be split equally
• One daughter on benefits
• One daughter retired and receiving state pension (but may resume part time work in this FY 26/27)
• House sale and other shares/investments are going through probate currently.

The Discretionary Trust letter received is very unclear as to the tax implications on either.

Can someone clarify/advise if the Trust is surrendered in full and split c.£16.5k each; what tax would have to be paid (if any)?

Many thanks

poseidon1

Insufficient information on the trust, ie:

1. Was it set up under the will of the husband?
2. How much was settled into trust at outset?
3. Was the trust fund invested or retained as uninvested cash?
4. Was the trust ever registered with HMRC and any trust tax returns submitted?
5. How much capital did the MIL expend/ withdraw from the trust prior to her death?
6. Are you certain the trust was discretionary? It would be very unusual as well as highly tax inefficient for that type of trust to be set up 7 years ago, either under a will or during the lifetime of the settlor, to benefit a surviving spouse and children.

In view of point 5 above, best to establish whether this really is a discretionary trust by supplying redacted wording of the operative clauses of the trust document ( the Discretionary Trust Letter?).

To assume it is discretionary without verifying this is the case, will lead to entirely wrong conclusions related to tax on termination and during the last 7 years.

aliababa

https://forums.moneysavingexpert.com/discussion/comment/82003695#Comment_82003695

Apologies, don’t know what I do and don’t need to cover.

1. Was it set up under the will of the husband? (No)
2. How much was settled into trust at outset? (100k)
3. Was the trust fund invested or retained as uninvested cash? (Estate Planning Bond summary states Investment Option as Global Architecture so I assume Invested)
4. Was the trust ever registered with HMRC and any trust tax returns submitted? (I believe not. While alive the retired mother drew approx £300/month from the trust)
5. How much capital did the MIL expend/ withdraw from the trust prior to her death? (MIL received/expended nothing from it at all)
6. Are you certain the trust was discretionary? It would be very unusual as well as highly tax inefficient for that type of trust to be set up 7 years ago, either under a will or during the lifetime of the settlor, to benefit a surviving spouse and children. (States this is a “Discretionary Discounted Gift Trust”)

Many thanks. Appreciate any clarity/guidance

aliababa

https://forums.moneysavingexpert.com/discussion/comment/82003719#Comment_82003719

please also note trust looks to have been set up 20 years ago

RAS

@aliababa

poseidon1 has provided very useful advice to posters regarding trusts, sometimes solving problems, sometimes helping identifying questions that the trustees need to understand and recommending the type of professional needed answer questions.

So you'll gain a lot by responding to their queries.

sheramber

https://forums.moneysavingexpert.com/discussion/comment/82003695#Comment_82003695

Not MIL ‘s trust but MIL’s parent.

aliababa

https://forums.moneysavingexpert.com/discussion/comment/82003766#Comment_82003766

absolutely, happy to respond to any and every query I can. Also appreciated his quick reply. I just responded to his queries above unless I’m missing something?

aliababa

MILs parent took £333/month I believe from trust inception to passing.

Initial trust was £100k, I cannot tell how much this might have grown by to give a total figure of how much taken/spent I’m afraid.

poseidon1

Just to be clear on my understanding , the remaining parties to this arrangement are your MIL and her sister ( daughters of the recently deceased ) and now surviving trustees and discretionary beneficiaries?

As it happens I am reasonably familiar with Discounted Gift Trusts ( DGTs) which can be a complex mix of trust and life company investment bond taxation.

I will cover the trust side of matters first.

From what you say 20 years ago ( not 7) a DGT was set up with £100k. Although you have not stated as such, my guess is this was likely a husband and wife joint settlement with the £333 per month withdrawal level set from outset of the plan - you might find the following article useful background reading as to implications of this -

https://techzone.aberdeenadviser.com/public/iht-est-plan/Tech-guide-discounted-gift

However the nature of DGTs is that value of the plan entering the trust part of the arrangement is not equal to the invested amount, it is discounted depending on age and state of health of the settlors. This is important since it is this Discounted value which dictates whether the trust needs to be intially reported for inheritance tax purposes,.

The creation of discretionary trusts are only IHT reportable if intial value exceeds 80% of the then prevailing nil rate band.

Nil rate band in or around year 2006 was £285k, 80% thereof being £228k. Therefore , even before the discount the trust fund was comfortably within the NRB so no IHT reporting obligations.

Discretionary trusts may also have 10 yearly anniversary IHT reporting obligations , but only if the trust fund values are again in excess of the NRB on the anniversaries. Clearly the trust escapes IHT reporting in 2016 on those grounds.

Finally , an IHT exit charge on a discretionary trust termination before the next 10 year anniversary , would be by reference to the last IHT charge on the previous anniversary. If no charge occured then no charge on termination. If in the present case , the trust has already passed its 20th anniversary, at a value of only £33k there can be no 10 year anniversary charge or reporting obligstion.

Turning now to encashment of the investment bond in trust.

£100k invested, almost £80k withdrawn over 20 years, now worth around £33k.

There is almost certainly a chargeable event income gain on the small profit which if encashed whilst held in trust would be subject to the special income tax rate of 45% applicable to trusts but with the benefit of a 20% tax credit if the bond is a UK variant . Top slicing relief which is usually available to individuals, does not apply to trusts.

Now if the sole lives assured on the investment bond were only the two parents, leading to the investment bond automatically terminating on the surviving parents death, then regrettably the chargeable event gain has already materialised and the trustees will have to submit a trust tax return to report and pay tax on the gain , but with the benefit of a 20% tax credit if the bond was a UK variant.

However, it was usual to add a younger life to the bond (one or other of the daughters ), to keep it in play after both parents demise and thereby permit a useful tax avoidance/mitgation strategy to be utilised by the trustees.

Therefore can you please confirm whether the investment bond is still running, in which case I will cover the tax mitigation strategy in a separate post.

aliababa

https://forums.moneysavingexpert.com/discussion/comment/82003900#Comment_82003900

thanks for such an extensive reply. Appreciate the time taken.

The letter received states ‘this policy was set up with a 99 year term, meaning the funds will remain invested with no requirement to surrender or make any immediate changes’ - so I assume this means yes the investment bond is still running.

poseidon1

If the investment bond is still running, the objective now will be to access the proceeds on eventual sale without the trust incurring an income tax charge as previously outlined.

This will involve the following action:

1. Terminate the trust in favour of beneficiaries
2. Assign a share of the investment bond to the beneficiaries
3. Once bonds in the ownership of the beneficiaries, they can then sell in their personal capacity with the benefit of top slicing relief to avoid higher rate income tax liabilities.

To achieve the outcome in 1) above the trustees will need to execute a Deed of Capital Appointment. The trustees should therefore contact the life company and see if they can provide a pro forma document for this purpose.

Thereafter a Deed of Assignment will be required to assign ownership of the bonds out of the name of the trust, into the beneficiaries personal names. Again relevant form to be obtained from the life company. In fact, depending on the life company, the form may combine both the Appointment and the Assignment in a single document.

Once they get to stage 3, they then sell their individual bonds at their own convenience.

A word of caution however, if either of the sisters have personal taxable income at or near the 40% income tax threshold (£50,270) their share of the investment bond gain could push them into higher rate tax, even allowing for top slicing relief. In that scenario a beneficiary in that position should probably spread the sale of segments of their bond over more than 1 tax year to avoid a tax liability.

However, since the trust is discretionary, there is the other option of the sister's bypassing receiving the bond themselves in favour of their own child or children who may be zero or lower rate 20% tax payers when encashing the bond.

Hopefully this post provides a road map to progress matters.