Mr And Mrs Richards wanted to find the best way possible to help get their daughter Mary on to the property ladder and set her up for life. Like many of our clients, they were scared, scared of making a substantial gift and losing control of that gift.
What if they gave Mary a house and she ended up in a divorce situation? Would they lose half of the gift they had made to their daughter? What if she got into financial trouble? What if she died before her husband would he get the gift and then what if he re-marries?
The solution for the Richards was to use a Discretionary trust to hold the gift.
Instead of buying a property outright for Mary or giving her the cash to buy the property, we set up a Discretionary Trust. The property was owned by the Trust for Mary’s benefit, and Mr and Mrs Richards are the Trustees, which means they are still in charge of the asset.
Why Trusts rather than Direct Gifts?
Trusts enable you to maintain control over the assets placed into trust, and in the case of Discretionary Trusts, the value does not appear in the beneficiaries’ estate for IHT purposes. The Richards have made a seven year gift (PET) so in Seven years after settling the gift into Trust the value of the gift will leave their estate for inheritance tax purposes.
Once the Trust has been established, the assets within it are outside of both your and the beneficiary’s estate. By passing assets in this way, you would not simply be passing your IHT liability on to your beneficiaries, nor would the assets be in their estates for other purposes, i.e. divorce, bankruptcy etc.
The Trust can benefit beneficiaries either by direct distributions or by loan (which can be interest free); for example, if the Trustees loaned funds to your children or grandchildren, they would always have a deduction from their estate for the amount of the loan. This will help if, at any time, they need asset protection, such as if they are in a divorce or bankruptcy situation. It will also help with their own IHT position as the loan will be a deduction on their estate.
We also use these types of trust to pass property down the generation not only for all the reasons listed above but because when you give a second property away you will normally trigger a capital gain. By gifting the property into a Discretionary Trust we can elect to hold the gain over saving the settlor (Our client) from paying a capital gains tax charge by making the gift.