Trusts School Lesson 3 Q&A

Q. Can you enforce a Trust that states a child cant benefit until age 25/30? Arent they able to access Trusts at their age of 18? I'm referring to both Will Trusts and Bare Trusts.

A. That’s a good question. If it is actually a bare trust and the beneficiary’s interest has vested absolutely, I don’t believe a trustee would be able to stop them demanding their entitlement upon attaining age 18. Under Saunders v Vautier if all beneficiaries are together absolutely entitled and are of full legal capacity they can bring a trust to an end. If however, it is not a bare trust and the beneficiary’s interest doesn’t vest absolutely until age 25/30 this rule would not apply.

Q. Are all trusts created on death for under 18's BM trusts? Are Bare Trusts created during lifetime for under 18s?

A. Not all trusts created for a beneficiary under the age of 18 is a trust for a bereaved minor. For example, one of the conditions is that the trust has been created under the Will of a deceased parent (or intestacy of a parent). If the trust was created by a grandparent, uncle, or auntie this condition is not met.

No trust created during lifetime can qualify as a trust for bereaved minor as they must be created by Will or intestacy.

Q. I am looking at a will trust and it states 'My trustees shall hold the trust fund on trust for such of my grandchildren living at the date of my death as reach the age of 25 and if-more than one in equal shares' is this still a bare trust?

A. Its unclear whether this is a payment date instruction or a contingency so you should seek advice from a solicitor.

Q. Most wills mention Trustees and upon trust but do not necessarily create a trust. How does one tell if a trust is created via a will or not?

A. If the estate is distributed between adult beneficiaries and there are no conditions on them benefitting from their share then it’s probably  just a question of distributing the estate. If in any doubt, it’s worth checking with a solicitor.

We agree it’s not always easy to tell but if you see anything along the following lines, its likely a trust has been created. This list isn’t exhaustive but hopefully will be of use.

• A legacy left for a child who is under age 18
• A legacy left for a child where it states they should only get the property upon attaining a certain age
• If the Will says a share of the estate is to be held on the following trusts and then there’s an explanation about who can benefit
• If there is a section in the Will which includes a definition of “life tenant”, “life interest” or “discretionary beneficiaries”
• If there is a comment that says something like the estate, or a share of it is to be “held for x for their life”

Q, Is there an issue with the trustees of a Will Trust also being beneficiaries?

A. Generally trustees need to ensure when they are making decisions as a trustee they are taking into account the interests of all the beneficiaries rather than just themselves. Where a trustee is also a beneficiary and is distributing trust property to themselves as a beneficiary, it’s best practice to have an independent trustee. That said the trust deed (or Will in this case) may include wording which states the trustee can act despite any conflicts so relaxes the general position.

Q. If a will trust gives the right to income to a beneficiary (e.g. spouse) but they don't need it, can they waive their right to it?

A. They can waive their right but it’s a complex area and legal advice should be sought. If they are legally giving up their entitlement there are IHT implications because they are then making a gift. Guidance can be found in HMRC’s IHT manual but they should seek legal advice.

IHTM16091 - Termination of interest in possession: the effect of terminating the interest - HMRC internal manual - GOV.UK

Q. Can you direct pension funds to a Will Trust under an expression of wish?

A. Yes however it is at the discretion of the pension scheme trustees as to whether they are willing to distribute to the trust. You will need to check the rules of the relevant pension scheme, for example some may only pay to trusts set up in the members lifetime.

Q. A wife has died and has 3 children. She owned 60% of their property. Surviving husband has 2 children. Her proportion has gone into a trust. Can the husband sell the property and move to something smaller while living, given that he owns 40% and the 60% ownership has gone into a trust for the children?

A. You would need to check the terms of the trust. However, we think you need to clarify whether the 60% share of the property has gone into trust for her children, or whether it’s gone into a life interest trust for the benefit of the husband, which on his death passes to the children. There is a difference. If there is a life interest for the husband, its common that a clause will be included which states the property may be sold and a new property purchased without impacting the life tenants rights. You do need to check the terms of the trust though as trusts vary widely in terms of the conditions.

Q. If a survivor of 2nd marriage (twice widowed) has received property through IPDI through their latest partners will (Deceased used their own NRB with other assets), can the client use their 1st husbands NRB if this was unused at that time to ensure survivor isn't dis adv from their own IHT calc

A. Yes, if they have been widowed they came to the next marriage with essentially two Nil Rate Bands, soit was probably good planning to nsure they did not inherit any NRB from their current spouse

Q. "Qualifying Interest In Possession Trusts" - Can you explain Qualifying for what please?

A. It’s just a way of describing different types of interest in possession trusts, broadly QIIPs are not relevant property whilst non qualifying are.

Q. In the IPDI case with Marjorie - what is tax position if Marjorie vacated the property and waived her right to return during her lifetime as a result of moving to a care home? Assuming only a residential property in the IPDI.

A. Marjorie could waive her entitlement but it’s a complex area and legal advice should be sought. If someone is legally giving up their entitlement there are IHT, and potentially CGT, implications because they are then making a gift. Guidance can be found in HMRC’s IHT manual but they should seek legal advice.

IHTM16091 - Termination of interest in possession: the effect of terminating the interest - HMRC internal manual - GOV.UK

Q. If will created a IIP trust how will this impact the RNRB?

A. There are various scenarios where an IIP trust’s existence could interact with the availability of the RNRB so without knowing exactly which one you mean, its difficult to say. We have a section in this article which outlines the RNRB’s interaction with trusts. Residence Nil Rate Band (RNRB): Facts | M&G for Advisers

The most common scenario we’re asked about is where you have an IIP created in a Will for a spouse (an immediate post death interest trust or “IPDI”), which on their death passes to their, or their spouse’s children. If this is what you mean then as long as the property within the IPDI trust meets the conditions to qualify as a “residential interest”, RNRB can be claimed against it as it is passing to lineal descendants on the life tenant’s death.

Q. Deed of variation into trust. Is there an immediate tax charge if over £325,000 ?

A. No. Entry charges relate to lifetime transfers. Where these exceed the settlor’s nil rate band over a 7 year period they suffer IHT on the excess at half the death rate i.e. 20%.

Where an individual has died, IHT is calculated on the estate depending on how much of the transfer of value on death is chargeable and how much is exempt. In your example the IHT on the estate would only increase if the deed of variation varied an exempt transfer e.g. to a spouse, to a chargeable one e.g. a discretionary trust.

Q. For Deed of Variation if client has been left money from a deceased relative who lives in Australia, can a Deed of Variation still be set up and if so, would it need to be done in Australia?

A. Excellent question which we do not have the knowledge to answer - need to speak to someone in Australia or someone here who is suitably qualified.

Q. On the Deed of Variation, are there not some circumstances when the 2 year rule can be extended?

A. The 2 year deadline comes from section 142 of IHTA 1984. We’re not aware of any circumstances where this can be extended.

Q. Can a deed of variation change an 18-25 trust without the beneficiaries consent?

A. We don’t believe you could. You need to be absolutely entitled to something in order to vary it. With an 18-25 trust, the beneficiary’s entitlement is contingent upon them attaining the specified age. Prior to that age their interest hasn’t vested so they can’t vary it.

Q. Isn't there an election to make if it is an absolute trust, and then the beneficiary becomes vulnerable and that then allows taxation as such and it is then construed as a vulnerable trust? confusing...

A. No election is made in respect of an absolute trust with a vulnerable beneficiary. Absolute trusts are transparent for tax purposes, so any income or gains are already assessed on the beneficiary i.e. no election is needed.

Q. Is it simpler to use an investment bond, rather than a GIA for a VPT ?

A. It can be simpler to use a bond but that doesn’t mean a bond should always be used as you need to look at it on a case by case basis. In terms of simplicity, investment bonds don’t produce income so there’s no need to complete a tax return unless there is a chargeable event. Even then, its possible to assign or appoint segments to the beneficiary if you want to access their personal tax position (rather than having the gain assessed on the settlor or trustees). With a GIA, the trustees are likely going to have to complete a tax return each year to report the income and complete a vulnerable person’s election if they want to access the beneficiary’s tax position.

Q. Does interest/dividends paid out within a GIA held in a personal injury bare trust affect Universal Credit payments?

A. Income which remains within the trust is disregarded for means tested benefits but if it is paid out it can impact them.

Q. Having spoken to a trust expert recently on a disabled persons trust, he suggested that it was a good idea to still register with the TRS as some banks will not set up a trustee bank account without this - do you have any view on this?

A. We don’t have a view on this as have no practical experience.. Most of the information we receive about opening a trustee bank account is anecdotal.

Q. Trust created by DOV - if you do a DOV without creating a Trust does this need to be registered on the TRS?

A. If a deed of variation has just redirected an inheritance and no trust has been created then there‘s no trust to register on the TRS.

Q. Do bereaved minor trusts need to be registered with TRS?

A. A trust for a bereaved minor is a statutory trust and is therefore exempt from TRS registration. However, if the trust has a tax liability, this exemption no longer applies and it needs to register as a taxable trust.

Q. When placing life policies into a Discretionary Trust, is it ok to use the standard classification of beneficiaries - spouse, children etc or would you suggest we actually nominate the beneficiaries?

A. Whether the classes of a particular discretionary trust are appropriate depends on the objectives of the settlor. Who do they want to benefit? Are they included in the standard classes? If yes that’s fine, if no, you should check whether beneficiaries can be added or use a different trust. In addition to making sure the intended beneficiaries are included, it’s a good idea for the settlor to write a letter of wishes and give this to the trustees. The letter of wishes isn’t legally binding but it does provide guidance to the trustees on how the settlor wants them to administer the trust fund.

Q. Can we email your tech dept directly to gain clarification on a trust created by a Will?

A. No. If you contact your account manager they can liaise with the technical team or set up a call to discuss technical queries.

Q. Unfortunately I was not able to view Lesson 2 - do you have a playback?

 A. Yes. You can view the recording here Trusts School Lesson 2 | Tech Matters | M&G Adviser

Q. If a client / Trustees make(s) a 'chargeable' withdrawal from an Investment Bond, and is therefore liable to Income Tax at RAT's, is there a way of claiming back this tax if the withdrawal is subsequently paid to the beneficiary who is a Basic Rate Tax payer?

A. No. Where trustee tax is paid on a bond gain its not reclaimable when the proceeds are distributed to a beneficiary. Its only income distributions to beneficiaries that come with a tax credit and although subject to income tax on chargeable gains, investment bonds do not produce income.

Q. Joint Settlor DGT Trust. If one settlor dies and the 5% Tax Deferred period has been used in full over the 20 years, will the regular monthly income be classed as a Chargeable Gain with 50% assessed on surviving settlor and 50% on the trust?

A. If there is no tax deferred allowance left, any partial withdrawals across segments will result in an excess gain at the end of the policy year (an excess gain arises where partial withdrawals exceed the available tax deferred allowance). In your example, if regular withdrawals continued you would have an excess gain at the end of policy year 21, again at the end of year 22, the end of year 23, and so on. You are correct that as one of the settlors has died in a previous tax year, their share of the gain would fall on the trustees (assuming the trust is UK resident). The other 50% share would be assessed on the surviving settlor and top slicing relief could be available. The first excess gain can be top sliced back to the commencement date of the bond, however in most cases, any subsequent excesses can only be top sliced back to the last excess gain. This could result in top slicing by 1 year which is not helpful.