Discretionary trusts can run for up to 125 years, so there is plenty of scope to skip one or more generations if appropriate.
What happens to a discretionary trust when the settlor dies?
A discretionary trust is one where the Trustees have full discretion on who will benefit and when. However, the Settlor has full access to the trust fund during his or her lifetime. On the death of the Settlor, the trust fund is held under a discretionary trust for the benefit of the discretionary beneficiaries.
When do you have to pay tax on a discretionary trust?
As with any other gift, transferring assets into a discretionary trust means there is inheritance tax to pay if you exceed the nil rate band allowance and die within seven years. Inheritance tax assessments are also mandatory on discretionary trusts every 10 years.
Who are the trustees of a discretionary trust?
A Discretionary Trust is a particular type of trust in which the beneficiaries and their entitlements to the fund are not fixed. The Settlor (individual creating the Trust) needs to appoint at least two Trustees to manage the fund. These Trustees make decisions about the Trust distribution.
Do you have to take into consideration CLTS when setting up a discretionary trust?
When setting up a new trust you have to take into consideration any previous CLTs (e.g. gifts into discretionary trusts) made within the last 7 years. Potentially Exempt Transfers (PETs) are not included in this cumulation. As long as this total does not exceed the settlor’s nil rate band (NRB) there will be no entry charge.
What happens to gift to discretionary trust on death?
Graeme dies 6 years after making his gift into discretionary trust. The gift of £50,000 and the gifts made within the previous 7 years do not exceed his available NRB on death. There is no IHT charge on the gifts however they do eat up some of his NRB which reduces what can be used against the rest of his estate.
