T died appointing sister as executor and sole beneficiary. The estate comprised cash and a property. The Sister would like to enter a Deed of Variation creating a discretionary trust of the property, usual Kessler precedent with broad band of beneficiaries including the “descendants of my parents” which would include the sister. Trustees (beneficiary and husband) intend to immediately (same day?) appoint revocable life interests to their two minor children who will receive the income. Does this arrangement fall foul of the Settlor related rules? If so what might be away around this situation. The sister doesn’t want to hand over a substantial property to her children at this time but doesn’t want the capital value or the income in her estate either.
My understanding is that the Deed of Variation creating the Discretionary Trust will remove the assets from the sisters estate as it is the deceased that is treated as making the gift for IHT purposes.
However, for income tax purposes, the income will still be treated as the sisters.
If sister creates by way of a DoV a discretionary trust with herself included as a possible beneficiary she is treated as the settlor (ITA 2007 ss472/3) and the trust will be settlor interested (ITTOIA 2005 s624).
The subsequent life interest appointments for sister’s two minors does not alter the above. Sister remains a potential beneficiary and hence trust settlor interested. Settlor therefore remains taxable on trust income.
ITTOIA 2005 s 624 overrides s629.
This I see foremost as a trust issue rather than a tax issue. Conflating the two makes matters very complicated.
The sister as the absolute owner of the property ( all tax liabilities have been discharged) can set up and settle a discretionary trust. There is no need for DoV,. She appoints herself as a trustee or as a sole trustee. She retains the power, execrable only by the Settlor, to revoke the settlement at any time. The deed empowers the trustees to appoint monies as she /they think fit. This ensures her total control total control over the trust. This is a revocable settlement, that regardless of value of transfer into trust, attracts no initial IHT charge(section 3(3) IHTA 84 but any ongoing income/gains that is tax able and any ten year charges that are payable fall to the Settlor for income and the trust for TYC . The initial transfer value will, subject to any exemptions and reliefs be or may be chargeable on the death of the Settlor or before should she transfer the property irrevocable to the trust.
For completion and certainty, she includes herself amongst a class of potential beneficiaries.
Paul Desmond Doherty