Discretionary Trust

It is possible for one person to place up to the limit of the nil rate band, which is £325,000 until 2015, into a Discretionary Trust without incurring a Chargeable Lifetime Transfer (CLT) Tax of 20%. Instead a Potentially Exempt Transfer (PET) would be created. A married couple could each transfer £325,000 to effectively create a total Discretionary Trust facility of up to £650,000. This would avoid a 20% tax charge because assets placed into the Trust(s) are below the chargeable limit of £325,000 per person.

Absolute Trust

An absolute trust could offer the same IHT benefit as a Discretionary Trust after 7 years; however the beneficiaries are set in stone for the future, i.e. there is no discretion to change. The practical implications of this are that any assets in this Trust could then be included in an assessment of the beneficiary’s estate. This could cause issues if for example a beneficiary was subject to a divorce allowing an ex-spouse to claim on the Trust assets. A creditor could also have a claim if the beneficiary of the Trust were to fall into financial difficulties. We have covered these potential issues already in previous areas.

 

 

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