Trusts Flashcards

1
Q

Three trusts that can only be setup by a Will or through intestacy

A

Bereaved minors trust

18 to 25 Trust

Immediate post death interest trust

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2
Q

The trustee act 1925 allows a new trustee to be appointed when an existing trustee:

A
  • is dead
  • remains outside of the uk for more than one year
  • wishes to step down
  • refuses to act
  • is unfit or incapable of acting
  • is an infant
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3
Q

Relevant property trusts

A

Discretionary trust
IIP trusts set up after 22 March 2006
IIP trusts where there’s been a change in beneficiary since oct 5 2008

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4
Q

Non relevant property trusts

A

IIP trusts set up before March 22 2006 , no change in beneficiary since oct 5 2008

Bare trusts
Trusts for the disabled
Immediate post death interests
Trusts for bereaved minors

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5
Q

Excluded property trust

A

Suitable for individuals resident in uk but NOT domiciled
Type of discretionary trust

If they become domicile in the UK asset in the trust remain outside estate for IHT

No chargeable life time transfer when non domicile

Can be domicile in uk after setting up trust

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6
Q

Bond intro trust

A

Taxable on settlor, or then trustee or then beneficiary when taking money out

20% deemed paid, first 1000@0%

Remaining % is 25%

Trustees assign to beneficiaries, not chargeable event. Payable by beneficiary.

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7
Q

CGT for IIP / DT

A

50% of annual exemption available (£6150) - if more than one trust is split to minimum £1,230

Rate always 20% and 28% for property

Holdover relief can be claimed

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8
Q

Income tax IIP trusts

A

Trust has no personal allowance, PSA or dividend allowance

All income taxed at BASIC RATE 20% or 8.75%

Trustees must pay tax if interest and dividends paid to them as paid gross

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9
Q

Income tax IIP beneficiary

A

Income treated same as normal income, they can use their own allowances

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10
Q

Trust management expenses IIP

A

Taken off after tax

Grossed up for IIP

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11
Q

Income taxation of discretionary/accumulation trust

A

First 1000 taxed at 8.75% or 20%
Split to minimum of £200 if more than one trust
Rest of income at 39.35% dividend and 45% all other income

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12
Q

Discretionary trust income paid out

A

All distributed Income paid out must be paid with tax credit 45%. So beneficiary receives 55%.

Beneficiary trust income received Classed as non savings income

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13
Q

Trust management expenses discretionary trusts

A

Gross up TME
Take it off total income then tax after. Reduces tax bill.

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14
Q

Discretionary trust income to beneficiaries

A

Every payment with 45% tax credit
Treated as non savings income for beneficiary
Cannot use PSA or dividend allowance

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15
Q

Trust registration service

A

Register of the beneficial ownership of trusts

Set up in 2017 requiring trustees to register if trust was liable to paying different types of tax

Requires majority of uk resident non taxable trusts to be registered

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16
Q

18-25 trust

A

Set up on death of parent/step parent
Start as non relevant property and becomes relevant property
Trustees can pas property between 18&25
No initial charge
No periodic charge as maximum life of trust is seven years

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17
Q

Benefits of a professional trustee

A

They are set up as a business. Trustee department of bank cannot die.

Professionals bring expertise to the role

They charge for their services so May be unsuitable for small trust

May be slower to make decisions

18
Q

Four key duties of trustees

A

To observe the terms of the trust

To act impartially between the different beneficiaries

To provide information to the beneficiaries including accounts

To advertise reasonable care and ensure correct distribution of assets

19
Q

For trustees to do they duties they should:

A

Hold title documents to any trust property

Ensure they are registered as the legal owners of the property

Must act in the best interests of the beneficiaries

Exercise care in the management of the trust

Invest any cash that comes into the trust unless its to be paid out to a beneficiary

Keep proper accounts of trust property

Invest the trust property and monitor the investments regularly

20
Q

Powers of trustees

A

Buy & sell investments and give receipt for property passed to them

• Insure property

• Settle debts or renegotiate their liabilities

• Maintain minors by advancing money for their maintenance, education or benefit

• Advance capital to a beneficiary.

• To lend funds to beneficiaries

To delegate certain matters to an agent or beneficiary

21
Q

When can beneficiaries take action against trustees

A

• Failure to pay beneficiaries their appropriate entitlement

• Use of unauthorised investments

• Using assets for the trustees’ personal benefit

• Not keeping proper accounts

• Trustees didn’t take professional advice

• Trustees haven’t taken account of recent economic, legal or taxation changes

22
Q

What form do trustees prepare for source of income and gross income

A

HMRC Form R185

23
Q

Tax on income distributed to beneficiaries from discretionary trust

A

If paid to beneficiaries, must be paid with tax credit of 45% regardless of its source

24
Q

Trust income received by discretionary trust to beneficiary when calculating income

A

Figure must be grossed up then added to income. Then if there is tax credit deduct from tax bill.

25
Order of priority for payment of chargeable event discretionary trust
The settlor Uk resident trustees Beneficiary
26
Who is a vulnerable person
A bereaved minor, that’s a child under 18 who has been predeceased by a parent A disabled person
27
Making a vulnerable person election
Trustees must complete form VPE1 and send to HMRC must be signed by both trustees and beneficiary The decision is irrevocable
28
When beneficiary of a relevant property trust dies, what happens to their estate?
It is NOT included in their estate, instead it is subject to periodic/exit charges
29
Exit charge calculation in first 10 years
Deduct the NRB at date of payment from initial value of trust Charge excess at 20% Divide this notional tax by the initial value of the trust to get percentage
30
IHT treatment of accumulation and maintenance trusts
Main use was to assist grandparents make lifetime gifts into trust for benefit of grandchildren They had options untill 6 April 2008 to Do nothing which meant became relearn property trust Trustees could amend trust so that beneficiaries had absolute entitlement at age 18 Trust could be amended so beneficiaries became absolutely entitled at age 25
31
To qualify as an offshore trust?
All trustees must be non UK resident
32
Loan trust
Settlor lends money interest free to trust on condition its repayable on demand Trustees usually invest in a bond and repay the settlor 5% or investment each year It is a loan rather than a gift, outstanding loan is included in deceased estate. Any growth is outside of the estate and available to beneficiaries
33
Discounted gift trust
Allows settlor to place lump sum into trust while retaining right to regular payment Usually placed into a bond in a discretionary or absolute trust Amount that is treated as a transfer for IHT is the gift less the retained amount Risk is that there is no guarantee of income that lasts a lifetime so depends on growth of investment
34
Flexible reversionary trust
Enables settlor to make a gift that is effective for IHT and can benefit from the trust The gift is a CLT Trustees invest this in a series of single premium endowments As each matures trustees can claim proceeds or extend policy If claimed they are paid to settlor
35
Accumulation and maintenance trust
Type of discretionary trust where one or more beneficiaries legally entitled to capital/income from age no later than 25 Until then income is held for maintenance/education/benefit of the beneficiaries Trust must be no longer than 25 years
36
Lump sum IHT trust plans
Loan trust Discounted gift trust Flexible reversionary trust
37
Loan trust
Settlor sets up trust Makes an interest free loan/repayable on demand Trustees invest in an investment bond Growth on bond outside settlor's estate Trustees use 5% withdrawals to repay loan to settlor Settlor only entitled to return of loan Settlor must spend loan repayments
38
Discounted gift trust
Settlor makes a gift to a trust PET if bare trust used/CLT if discretionary trust Settlor retains the right to fixed capital sums Gift is discounted for the purposes of IHT transfer Settlor's retained rights have no value on death Discount only relevant if settlor dies within 7 years Settlor makes a gift for IHT purposes but retains a right to income Not a GWR and POAT does not apply Relatively inflexible
39
Back to backs
Individual buys an annuity on their own life Takes out a life policy on their own life under trust On death annuity has no value and the life policy is outside the estate for IH For those in good health that have assets that can't be gifted such as a house Can be single or joint life basis Life policy must be underwritten Capital content of annuity is tax free interest element is taxable Trust is usually discretionary
40
Trust review may be triggered by
Death of trustee/beneficiary Serious illness of trustee/beneficiary Bankruptcy of settlor, trustee or beneficiary Beneficiary’s marriage/separation/divorce Changes in income/wealth Disputes between settlor/trustee/beneficiary
41
Discretionary trust starting rate and rules
£1000 starting rate at 8.75/20%, reduced to £200 minimum if multiple trusts