This trust could be ideal for those looking for inheritance tax planning and a fixed, regular income. After seven years, the value of the gift moves out of your estate, so there won’t be any inheritance tax to pay on it. Any growth on the investment is outside of your estate from day one.
How the trust works
A trust is a way of managing assets (such as money or investments). It is a legal arrangement where someone (the settlor) puts some assets into a trust and appoints a person or group of people (the trustees) to look after the assets for the benefit of a person or group of people (the beneficiaries). There are different types of trusts which have different features and benefits.
Our Discounted Gift Trust
Decide the level of payments
With this trust, you’ll first need to take out one of our investment bonds. At the same time, you’ll need to decide on the level of regular payments you’d like to receive for the rest of your life. These regular payments cannot be changed.
Calculating the discount
Based on your life expectancy, we work out the expected value of providing those regular payments. This amount is immediately outside of your estate (the discounted part), which could give you an immediate reduction in inheritance tax.
Placing the bond in trust
The investment bond is then transferred into trust with the rest of the investment being treated as a gift, which will be outside your estate after seven years. Any growth is outside of your estate from day one.
Accessing your money
With a discounted gift trust, you can receive fixed regular payments made from the investment.
This trust is only suitable if you’re certain that you’ll need these fixed regular payments for life and don’t need access to the capital. If you don’t need fixed regular payments, or want to take ad hoc payments, this trust might not be suitable for you.
A bare or discretionary trust?
Bare Discounted Gift Trust
With this option, you can’t change the beneficiary at a later date, so you’ll need to be certain about who you choose. The trustees will manage the investment for you and for the named beneficiary after your death. Once the beneficiary is 18, they can manage the investment themselves.
Discretionary Discounted Gift Trust
With this option, you state a class of beneficiary such as ‘my children’ or ‘my grandchildren.’ The trustees can decide after your death who’ll benefit from the trust and when.
Products that can be placed in this trust
When money’s withdrawn from an investment bond in a discounted gift trust, income tax might need to be paid. The person who needs to pay the income tax depends on whether the trust is bare or discretionary. For a discretionary trust, it also depends on whether the settlor is still alive.
A discounted gift trust could immediately reduce the value of your estate for inheritance tax, as part of the investment may be outside your estate immediately.
Once the investment’s been in the trust for seven years, the amount gifted is totally outside of your estate and you won’t need to pay inheritance tax on it.