- Recently divorced
- Age 63 and approaching retirement
- Insufficient income for retirement
- Recently inherited some money from her parents
- New wealth, coupled with value of her house means her children will pay inheritance tax when she dies.
- Likes simple investments
A Delta Discounted Trust Account
Deanna realises that she doesn’t have sufficient pension income and was planning to work until she was 70, however, she has inherited £200,000 from her father, who passed away recently.
She has not made any other gifts in the previous seven years and after speaking to her professional adviser decides to invest in a Delta Discounted Trust Account from Canada Life International. This arrangement is set-up to provide her with payments of £8,000 each year to supplement her pension income, allowing her to retire earlier than expected. The underlying investment could be in one or more life funds and as Deanna is not a sophisticated investor, she and her adviser select a simple managed fund consistent with her risk profile.
She sets up a suitable trust, appointing people to look after the trust [the trustees] and as she does not want to name specific beneficiaries, she opts for a discretionary trust making her children potential beneficiaries. The trustees are able to add in additional potential beneficiaries if they choose, for example if there are any grandchildren in the future.
As Deanna will continue to receive regular payments from this investment, Canada Life International will need to calculate the value of these future payments – this is known as the ‘discount’. This discount will depend on life expectancy; based on her age, lifestyle choices and health. The longer her life expectancy, the longer the payments are likely to continue for and the higher the capital value of the regular payments.
In this instance, Deanna receives a discount of £95,000 and this is outside her estate immediately, as she has effectively converted a lump sum into a series of regular payments that will cease when she dies – this will therefore have no value at the time of her death. The remaining £105,000 of the investment is a gift into the discretionary trust.
- All of the growth is outside of Deanna’s estate immediately.
- The discount of £95,000 is outside her estate immediately.
- The remaining investment of £105,000 is outside her estate if she lives for another seven years.
- The underlying investment is held in an international investment bond, so the regular payments would not incur an income tax liability until the payments made to Deanna exceed £200,000 in total.
On Deanna’s death
- The trustees will stop the regular payments from the trust.
- The use of a discretionary trust allows the trustees flexibility after Deanna’s death on who will benefit and when.
- The money in the discretionary trust will not be in the beneficiaries’ estate, providing protection from divorce, bankruptcy and inheritance tax on their estates.
In this instance the trustees decide to hold onto any remaining value of the trust, preferring to save it for Deanna’s grandchildren.
- The value of investments can fall as well as rise and you should speak to a professional adviser to ensure that any investment is suitable for you.