To stop payments the settlor would need to relinquish their entitlement to capital payments and a solicitor would be able to draft a suitable deed in order to achieve this objective. In view of the above it is important that the client understands they are carving out access to capital payments for the rest of their life because although in theory it is possible to stop payments, the cost of employing legal, underwriting and actuarial expertise is likely to be expensive.
Again this depends what the trust wording says. In general, the full payment will continue until second death. If this is a potential issue and a discretionary trust basis has been agreed then a single settlor DGT for each of them may be more appropriate.
Learn about the role discounted gift trusts play in inheritance tax planning. Learn about changing the underpinning investment on a discounted gift trust which has been used for lump sum inheritance tax planning.
Information on discounted gift trusts and payment to beneficiaries; what to consider for payment to a beneficiary of a discounted gift trust while the settlor is still alive. Pru Adviser. Confirm Cancel. PruAdviser on-line services will be unavailable from on Saturday 13 November until on Sunday 14 November for website maintenance. We apologise for any inconvenience caused.
Last updated on 22nd Mar Q1: If the client is declined a discount does this mean a DGT is unsuitable? Q4: Is the Ongoing Adviser Charge taken into account when calculating the discount?
Clients can choose from discretionary trusts and absolute trusts. Clients will complete the application form and the trust deed. The dating of trusts can cause confusion and different insurance companies may have different rules. Usually under a discretionary trust the trust and bond are dated the same day. Normally under an absolute DGT the trust deed is left blank and the client will be told what date to insert after the policy has been issued. The settlors carve out regular payments that are payable until both have died if there are joint settlors.
This is an absolute indefeasible right to the regular payment stream and the trustees have to ensure that they do not make large payments to beneficiaries that may cause the funds to run out. Normally only small ad hoc payments are available to beneficiaries depending on the rules of the trust. As stated previously, while the settlors are alive, some trusts allow small ad hoc payments to be made to beneficiaries.
However, on the death of the settlors it depends on whether it is an absolute trust or a discretionary trust that has been chosen. Under an absolute trust, the beneficiaries can demand the trust fund once they reach age 18 16 if written under Scottish law and the trustees are legally obliged to inform the beneficiary that the trust fund exists. If an absolute beneficiary dies, the trustees have to look at the will or follow intestacy rules to see who will now benefit.
As long as the beneficiary is in the class of beneficiaries, the trustees can allocate funds to them. But what about the long-term implications? There are various pitfalls to be avoided with DGTs - not least when the settlor dies. At outset of the DGT, the settlor requests a series of regular capital payments payable for their lifetime, or until the fund is exhausted. This series of payments is generated from partial withdrawals from an investment bond subject to a suitable trust.
In effect, it is an exchange of part of the initial gift for an income stream. The product provider medically underwrites the settlor in order to establish their life expectancy based on their state of health and lifestyle.
The younger and healthier the settlor, the higher the market value of the income stream, as payments could potentially continue for longer. This will therefore give a larger discount. If the settlor is older or in poor health then the payments may not continue for as long and, therefore, the market value is lower and the discount is smaller.
Paul was a successful businessman and determined that HMRC would not get more than its fair share of his money in taxes, even after his death. Helpfully HMRC has confirmed that no exit charge will arise on payments made to the settlor under a discretionary DGT because this property is already treated as being held absolutely on bare trust for the settlor. After that, the usual rules for the taxation of bonds will apply. This income tax simplicity is the reason why DGTs work best with bonds.
In theory a different investment vehicle could be used but that would involve a number of complex and potentially unattractive tax consequences for the settlor and trustees. At the moment trusts holding bonds do not need to register with HMRC until a tax lability arises. For non-taxable trusts in existence on or after 6 October , registration is require by the 1 September A DGT is an excellent, tried and tested, method of allowing an investor to make an IHT effective gift while retaining a right to a series of tax-efficient cash payments on set dates in the future throughout life and leaving a residual fund for their beneficiaries after their death.
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