- Age 70 and never been married.
- Accumulated wealth and house value means that inheritance tax would be payable when he dies.
- He is unsure who he will leave his estate to – he has no children of his own but does have nieces and nephews who have children.
- Wants to generate an additional income from his investments and reduce potential inheritance tax payable.
- Has not made any other gifts in the previous seven years.
- His investments are held on investment platforms as he and his adviser like to regularly vary the assets held.
The Premiere Discounted Trust Account
Eric’s adviser has been talking with him for a while about inheritance tax planning but Eric has been reluctant as he wants to retain an income and is unsure who he wants to benefit when he dies. In order to generate payments to supplement his income he decides to invest £600,000 in a Premiere Discounted Trust Account with Canada Life International.
At outset, Eric requests payments of £2,000 each month and these payments will continue until Eric dies or the investment is exhausted. Eric and his adviser design a portfolio of investment funds available from Eric’s preferred investment platform that can be held in the underlying investment.
As part of the application process, Eric sets up a suitable trust. He appoints people to look after the trust [the trustees] and as he does not want to name specific beneficiaries, he opts for a discretionary trust making his nieces and nephews the potential beneficiaries. The trustees are able to add in additional beneficiaries if they choose.
As Eric will continue to receive regular payments from his 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 his life expectancy; based on his age, lifestyle choices and health. The longer Eric’s life expectancy, the longer the payments are likely to continue for and the higher the capital value of the regular payments.
In this instance, Eric receives a discount of £275,000 and this is outside of his estate immediately, as he has effectively converted a lump sum into a series of regular payments that will cease when he dies – this will therefore have no value at the time of his death. The remaining £325,000 of the investment is a gift into the discretionary trust.
- All of the growth is outside of Eric’s estate immediately.
- The discount of £275,000 is outside his estate immediately.
- The remaining investment of investment of £325,000 is outside of his estate once he 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 back to Eric exceed £600,000 in total.
On Eric’s death
- The trustees will stop the regular payments from the trust.
- The use of a discretionary trust allows the trustees flexibility after Eric’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, at the time of Eric’s death one of his nieces is getting married so the trustees advance her some money towards the wedding, retaining the rest for the time-being.
- 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.