- Age 71 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 the potential inheritance tax payable.
- Has not made any other gifts in the previous seven years.
- His investments are managed by a discretionary investment manager.
The International Portfolio Bond Discounted Gift Trust
Jerry’s professional adviser has been talking with him for a while about inheritance tax planning but Jerry 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 an International Portfolio Bond Discounted Gift Trust with Canada Life International Assurance (Ireland).
At outset, Jerry requests payments of £2,000 each month and these payments will continue until he dies or the investment is exhausted. Jerry and his adviser select a suitable discretionary investment manager who will act as custodian and manage a portfolio of investment funds in line with an agreed mandate, consistent with Jerry’s risk profile.
As part of the application process, Jerry 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 potential beneficiaries if they choose.
As Jerry will continue to receive regular payments from his investment, Canada Life International Assurance (Ireland) 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 Jerry’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, Jerry receives a discount of £275,000 and this is outside 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.
- Any growth is outside of Jerry’s estate immediately.
- The discount of £275,000 is outside his estate immediately.
- The remaining investment of £325,000 is outside 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 Jerry exceed £600,000 in total.
On Jerry’s death
- The trustees will stop the regular payments from the trust.
- The use of a discretionary trust allows the trustees flexibility after Jerry’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 Jerry’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.