Why discounted gift trust

However, if two single settlor DGTs are selected, the right to the retained payments on one trust will cease upon the first death. This could be an issue where the surviving settlor relies on the retained payments. Where the surviving settlor is also a beneficiary of the first settlor's trust then they can of course still benefit from that trust, either in the form of regular payments or larger lump sum payments.

Joint discounts are calculated based upon combined life expectancy, that is, on the probability of both settlors dying. This may give a slightly different overall discount compared with two single settlor DGTs, but it will depend upon individual circumstances.

The trust is typically established by the settlor making a cash gift to the trustees. It isn't normally possible to use an existing bond or other investment to create the trust - these will generally need to be encashed and the proceeds used to establish the discounted gift trust.

The trustees then invest the trust funds by taking out an investment bond onshore or offshore although some schemes use a series of endowments. Regular withdrawals are set up to provide the settlor's capital payments. The use of non-income producing assets, such as bonds or endowments, means there's no trust tax reporting needed unless there's a chargeable gain. Under the discretionary trust, no beneficiary has a right to either income or capital.

The trustees are able to appoint income or capital at their discretion to any beneficiary within the class of potential beneficiaries named in the trust deed.

The flexible trust names the beneficiaries who are entitled to any trust income. However, if the trust is invested in an investment bond, no income is produced. The trust includes an overriding power of appointment which allows the trustees, which will usually include the settlor, to alter the beneficiaries or their respective shares in the trust.

This is especially useful where the settlor may want to alter the beneficiaries in the future. For example, where there are new beneficiaries born after the trust is created, such as grandchildren, or perhaps where the named beneficiary falls out of favour.

Under the absolute trust , the beneficiaries are fixed at outset and cannot be amended by the trustees at a later date. The beneficiary of the absolute trust only becomes entitled to the capital and income from the trust after the retained payments cease upon the death of the settlor.

When selecting the absolute trust, the settlor should be certain of who they ultimately want to benefit from the trust. The IHT treatment will depend upon the type of trust used:. The value of the transfer for IHT may be discounted by the value of the settlor's retained payments.

Where a flexible or discretionary DGT is created, IHT may be payable if the value of the CLT, net of any discount, exceeds the available nil rate band taking into account any other chargeable transfers made by the settlor in the previous seven years. Provided the settlor survives for seven years from making the transfer, no further IHT is due on death.

Provided the settlor survives for seven years from the date of the transfer, there will be no IHT payable. The discount is often described as a reduction in the value of the gift based on the present day value of the payments the settlor might receive during their lifetime. The actual discount is the market value of the settlor's retained payments. This is based on the hypothetical price a buyer would be willing to pay for the settlor's right to future capital payments.

This price would depend on:. The future payments the settlor could expect to receive are then converted into a 'present day' cash value using the interest rate given by HMRC. This is to allow for the effect of inflation on a fixed income stream. Life expectancy is calculated on the basis of age and health. HMRC require evidence that medical underwriting was carried out at outset to agree a discount. Current HMRC practice doesn't allow discounts at outset for settlors aged 90 and over, or where ill-health means that they have the life expectancy of someone aged 90 or over.

A discounted gift trust can still be created even where no discount is available. The settlor is still making a gift which will be outside of the estate if they survive for seven years and they will continue to benefit from retained regular payments. The discount on a joint settlor DGT is calculated on the combined life expectancy, as the retained payments will continue in full until the second settlor dies.

However, it's split between the two settlors on the basis of their own individual life expectancy. At that time the trustees can then either distribute the trust assets to the beneficiaries or retain them until a later date if they choose. For a cash gift the estate is normally reduced by the value of the cash gift, however, sometimes it is not that simple.

When investing in a discounted gift trust, the settlor retains the right to the regular payments and these payments have a capital value. As part of the application process the provider will need to calculate the actuarial value of these payments and this will depend on a number of factors, such as interest rates, the amount of the payments and the health and lifestyle of the settlor. This enables the provider to establish the life expectancy of the settlor and how long the payments are likely to be paid for.

Your Industry. When selecting the absolute trust, the settlor should be certain of who they ultimately want to benefit from the trust.

Key features of a discounted gift trust DGT :. If the settlor is considered to be in reasonable health, a calculation is made about the likely total amount of income that will be paid back to him by the trustees. The remainder will be treated like any other gift into a trust — such as a chargeable lifetime transfer CLT in the case of a discretionary trust, or a potentially exempt transfer PET in the case of a bare trust, falling outside the scope of IHT after seven years. If the settlor dies within seven years, one might think that his retained discount should go to his personal representatives to form part of his estate.

However, the HMRC tested and accepted IHT treatment is that this right to an income for life has no value once the settlor has died, so no money has to be returned.

The rest of the money will be treated like any other gift into the trust and brought back into IHT calculations if death occurs within seven years.

As a result of this, there is an immediate IHT reduction upon creation of a discounted gift trust, making it a powerful IHT planning tool for anyone in their later life, whose intentions are to draw income from their investments throughout their lifetime and then pass on the remainder to their beneficiaries.

We would highly recommend reading the 'expert verdict' section of this review to make an informed decision. Additionally, here's a free guide that can help you achieve better results. In this guide, you'll learn:. The discount rate is calculated based on both mortality rates for your age, as well as an in-depth medical testing to determine a fair discount factor for the gift, based on the value of the retained revenue stream.

By using a discounted gift trust, you give up the right to the capital and can only access the income stream which is set at a pre-agreed amount and is inflexible. The whole value of the gift will be free from IHT if the settlor survives it by 7 years.

The settlor receives pre-agreed regular payments that are fixed for their lifetime. The payments cannot be amended once the policy has commenced. This will suit those that are looking for the certainty of receiving known amounts for the rest of their days.

If the regular payments are not being spent and are being accumulated within the estate, it may undo the effectiveness of the estate planning.

The trust is typically established by the settlor making a cash gift to the trustees. It isn't normally possible to use an existing bond or other investment to create the trust - these will generally need to be encashed and the proceeds used to establish the discounted gift trust.

The trustees then invest the trust funds by taking out an investment bond onshore or offshore although some schemes use a series of endowments. Regular withdrawals are set up to provide the settlor's capital payments.

The use of non-income producing assets, such as bonds or endowments, means there's no trust tax reporting needed unless there's a chargeable gain. The trust provisions will determine whether it's possible to change the underlying investments.

If they do, there are some important considerations for the trustees. The regular withdrawals made to the settlor as part of the settlor's retained payments are not treated as exits.

This is because the settlor's retained payments are held upon a bare trust for the settlor and are not relevant property. Where capital is paid to a trust beneficiary - for example, after the death of the settlor or where the trust provisions permit, advanced to the beneficiary during the settlor's lifetime - there will potentially be an exit charge.

Would you like to share your experience and opinion to help other people make an informed decision? Please send your reviews and comments to us.

A discounted gift trust DGT can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis, as does the case for using trusts in general. If you already have a trust structure in place and would like a Second Opinion - or, if you are wondering whether the utilisation of a trust could be of benefit to you, contact us. Therefore these reviews do not come with a star rating.