Discretionary trust where the settlor is taking income


(Anne Slater-Brooks) #1

I have come across a situation whereby a DT was established in 2014 and the trustees have set up a regular income for the benefit of the settlor.

This clearly is in breach of both the trust rules but also impacts on the inheritance tax planning for what it was intended.

Am I right in thinking this would simply be a GWR and thus would achieve nothing for IHT? If they turn off the income now, would that start the seven year clock from now?

Anne Slater-Brooks
Ingenious


(Paul Saunders) #2

It seems to me that the question is whether the creation of the trust was a sham, or the trustees are acting in breach of trust in making payments to the settlor.

If the former, the trust is void.

If the later, the trust needs to be reconstituted. Ideally, the settlor should return to the trust all that they have received together with compensation for the loss to the trust of the use of those monies whilst in the settlor’s hands. To the extent the settlor fails to restore the trust, the trustees will be personally liable. Strictly, the trustees are liable to restore the trust out of their own resources and then recover from the settlor, but this tends to create a more contentious situation for the advisers.

The tax implications will follow the actuality, depending upon whether the trust is a sham (and, therefore, never existed) or if it was intended to be operated as set out in the trust instrument.

Paul Saunders


(Paul Desmond Doherty) #3

It depends on whether the Settlor has retained a power to ‘revoke’ the settlement. If he retained such a power or reserved the Interest in Possession,Reversionary interest or a Settlement Power to himself then the trustees must comply. If not, there will be a breach of trust.

Paul Desmond Doherty