GENERATIONAL TRUST PLANNING
AND ADVISER CHARGING
Jim Callaghan
Business Development Manager – Guarantee Sales
Learning Objectives
• By the end of the session you’ll be
able to explain
• IHT Planning through Loan Trusts and
Discounted Gift Trusts
• The technical details of these trusts
• The interaction of trust planning and
adviser charging
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
The number of estates hit by
IHT in 2014 will increase by?
A.
B.
C.
D.
10%
25%
33%
50%
The number of estates hit by
IHT in 2014 will increase by?
A.
B.
C.
D.
10%
25%
33%
50%
London
£424,000
South East
£305,000
IHT Threshold
£150,000
London
£81,000
South East
£77,000
UK £62,000
Source: Office for Budget Responsibility
UK £251,000
IHT
Threshold
£325,000
Why?
• It isn’t just about IHT planning….
• …. it’s about control:
•
•
•
•
Who gets the money
When they get the money
How they get the money
Avoiding the need for probate
• But let’s not ignore the tax benefits
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Bare or Discretionary?
Bare
• Potentially Exempt
Transfer
• Outside estate after
seven years
• Beneficiaries and shares
cannot be changed
• Legal entitlement at 18
– 16 in Scotland
Discretionary
• Control over who and
when
• Chargeable Lifetime
Transfer (IHT100)
• 20% Lifetime Charge
(= 25% if Settlor pays)
on excess over £325k
Nil Rate Band
Handset Question:
Would you like more information on
the changes to 10 year and exit
charges?
1. Yes please
2. No thank you
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Gift Trust
•
•
•
•
•
•
•
Simple
Outright Gift
Capital
No interest for Settlor
Parents to children
Grandparents to grandchildren
Popular for school fees/educational
funding
Gift trust (bare)
Settlor makes gift into trust
Trustee
Growth
outside estate
from day one.
IHT free.
Trustee
Gift
£
Absolute beneficiaries:
 Can’t be changed
 Entitled at age 18 (16 Scotland)
 Not settlor though
PET
Outside estate
after seven
years.
trust
(bare)
GiftGift
trust
(discretionary)
Settlor makes gift into trust
Trustee
Growth
outside estate
from day one.
IHT free.
Trustee
Gift
£
Absolute
Range of beneficiaries:
beneficiaries:



Can’t
be changed
Children/Grandchildren
Entitled
at former
age 18 spouse
(16 Scotland)
Spouse or
Not settlor though
CLT
NRB back
PET after
seven years.
Outside
estate
Potential
20%
after seven
tax, years.
10-year &
exit charges
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Loan Trust
•
•
•
•
•
•
•
Settlor retains right to return of capital
Freezes IHT liability
No Gift element, so no PET/CLT
All growth immediately outside estate
Income stopped/started at any time
Slower-burn
Appropriate for younger settlors –
parents to children
 Peter is 45 and in poor health
 Needs to think about IHT planning
 Also wants to supplement income
 He sets up a £200,000 Discretionary Loan Trust
 Trustees have a number of investment options:
 Deposit Account
 OEIC/Collective Investment
 Single Premium Bond
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 After consideration, Trustees invest
in a Unit Linked Guaranteed bond:
 Certainty of £10,000 p.a. income for a
minimum of 20 years
 Range of risk graded funds
 Enhanced death benefits
 Highest bond value = £220,000
 Dies after year nine
 Cash-in value on death is £70,000
 Bond pays out £130,000
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Without Protection With Protection
Investment Amount
£200,000
£200,000
Payments Received
£90,000
£90,000
Outstanding Loan
£110,000
£110,000
Death Benefit
£70,000
£130,000
Shortfall on Loan
£40,000
Nil
IHT @ 40%
£44,000
£44,000
Capital left to Children
£26,000
£86,000
Trustee Liability
Yes
No
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Settlor
Income
IHT efficiency
Legacy
Beneficiaries
Trustees
Repayment of loan
Investment strategy
Minimum responsibilities
IHT efficiency
Legacy
Tax efficiency
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Discounted Gift Trust
• Settlor retains right to regular income
stream
• Single or joint (spouse or civil partner)
• Fully underwritten
• Discount based on age, health and
income (but not gender)
• Discount on death within seven years
• Appeals to older ages – grandparents to
grandchildren
Discounted Gift Trust
• Clive and Alice Jenkins retired
couple
• Nil rate band allowance used
• £250,000 of investments each
• Potential IHT of £200,000
• Need £20,000 income per year
• Leave money on death for
grandchildren
Discounted Gift Trust
• Joint Life Bare Discounted Gift
Trust for £500,000
• Total discount = £260,009
• Potential IHT saving = £104,003
• 4% income = £20,000 per year
• Income to survivor on first death
• Beneficiary access on second
death
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Taxation of a bond held in Trust
The “Pecking Order” (S467 Income Tax Act 2005)
• The Settlor where alive and UK resident (and also in tax
year of death). Marginal rate. Possible top slicing relief
• UK-resident Trustees following tax year of settlor’s death
or where settlor non-UK resident. Liable at rate applicable to
trusts – 45% - no top slicing relief
• Where trustees non-UK resident, the Beneficiaries to the
extent they have benefited at their marginal rates
• However, assignment to Beneficiaries may be more tax
efficient
• Bare trusts are exception to this rule, as gain assessed to
tax on the Beneficiary, subject to anti-avoidance provisions
Gift
(Disc)
Gift
(Bare)
Loan
(Disc)
Loan
(Bare)
DGT
(Disc)
DGT
(Bare)
Income






Access






Control






IHT






Trust Planning Decision Tree
Handset Question:
Would you like a copy of Aegon’s
Trust Decision Tree?
1. Yes please
2. No thank you
Why Single Premium Bonds?
Certainty of returns with
Unit Linked Guarantees
(Income, Capital, Death)
Single Premium Bonds =
Non-income producing asset
Wide variety of
trusts
SINGLE
PREMIUM
BOND
Administration
simplicity
No tax on
Fund
switches
Income tax
deferred until a
chargeable event
occurs – can use
assignments
No income tax using
5% withdrawal facility
No further tax on
underlying income
Agenda
• Bare v Discretionary Trusts
• Gift Trusts
• Loan Trusts
• Discounted Gift Trusts
• Taxation
• Adviser Charging
Adviser charging
• Watch out for pitfalls – particularly GWR
• Landscape has changed post-RDR
Settlor
Trustees
Step 2
Step 1
£
Settlor is the
adviser’s client – i.e.
the person with the
wealth, however…
…on the gift of capital
to a trust, the Settlor
cannot benefit in
anyway from the
trust fund – i.e. any
adviser charge for
managing Settlor’s
affairs.
Adviser can have a
separate relationship
with the trustees to
provide advice.
Key Point
The settlor could be a
trustee – however they
would be dealing with the
adviser in a different legal
capacity
step 3
Beneficiaries
These will likely be the
children or grandchildren
of the settlor.
Settlor
Initial fee for adviser on
recommending trust planning
Ongoing fee for adviser on
reviewing other personal
assets
What is the easiest way for
the adviser to be remunerated
for the services to his client?
Trustees
£
Adviser
Initial fee for adviser on
recommending trustee
investments
Ongoing fee for adviser on
reviewing trustee
investments.
Potential for ad-hoc payments
for advice to the trustees.
These are the Adviser’s
remuneration options –
not all may be met from
the product
Initial Adviser Charge
• Use Pre-Investment option where available
– Premium is the Contribution less the IAC
– Gift/Loan into Trust is the Premium
– Settlor not seen to benefit from trust property
• If only Post-Investment IAC facilitated:
–
–
–
–
Settlor must pay adviser directly out of own funds
Or, initial advice recorded as provided to the Trustees
Will be part of first year’s 5% “income” allowance
Gift/Loan into Trust is the Contribution/Premium
• Existing bonds
– Owned by Settlor can be assigned into trust (Gift Trust
only)
Pre-investment – Settlor IAC
Settlor’s cheque: £100,000
Initial Adviser Charge: £3,000
Bond Investment: £97,000
Gift into Trust: £97,000
• Loan Trust – Loan to be repaid is £97,000
• DGT – Income and discount calculated on % of £97,000
Pre-investment – Trustee IAC
Settlor’s cheque: £100,000
Bond Investment: £97,000
Initial Adviser Charge: £3,000
Gift into Trust: £100,000
• Loan Trust – Loan to be repaid is £100,000
• DGT – Income and discount calculated on % of £100,000
• DGT – Income will be lower in year one
Ongoing Adviser Charge
• Will count towards the 5% p.a. “income”
allowance
• 0.5% OAC = Max 4.5% “income”
• Avoid fund-based OAC
• Bonds assigned into trust by Settlor will need
new OAC agreement signed by Trustees
• OAC paid from Loan Trust by Trustees will not
reduce the outstanding loan
• OAC paid from DGT by Trustees will reduce the
Settlor’s income for discount purposes
Conclusion
• The benefits of trust planning are just as
relevant in the post-RDR environment…
• … but the consequences of getting it wrong can
be serious
• Ensure you check which options your provider
facilitates
• Unit Linked Guarantees can add an additional
level of certainty to trust planning
Handset Question:
Would you like more information on
how Unit Linked Guarantees can
help with Trust Planning?
1. Yes please
2. No thank you
Learning Objectives
• By the end of the session you’ll be able
to explain
• IHT Planning through Loan Trusts and Discounted
Gift Trusts
• The technical details of these trusts
• The interaction of trust planning and adviser
charging
Thank you
Jim Callaghan
Business Development Manager – Guarantees
jim.callaghan@aegon.co.uk
07740 897 330
aegon.co.uk
@aegonuk
Aegon is a brand name of Aegon Ireland plc. Aegon Ireland plc, registered office: 2 nd floor, IFSC House, Custom House Quay, Dublin 1,
Ireland. Registered in Ireland (No.346275). Authorised by the Central Bank of Ireland and subject to limited regulation by the Financial
Services Authority. Details about the extent of regulation by the Financial Service Authority are available from us on request. An Aegon
Company. www.aegon.ie
© 2014 Aegon Ireland plc
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