I need to advise trustees on an 18-25 trust for grandchildren which has substantial assets. The first of the grandchildren attained 25 on 10th April this year and is now entitled to his share. If his distribution happens on say 30th June, is he entitled to his 1/6 share of the value as at April or as at 30th June and does it make any difference if the distribution is in stocks and shares or cash? There is power to appropriate assets in the trust deed. How do we deal with costs, can we reserve an unspecified amount, as there will be costs specifically related to his share, principally the IHT exit charge (a theoretical maximum charge of 4.2%) plus liabilities as at 5th April for the settlement as a whole. The trust deed does not refer to costs. Because the tax pool is insufficient to frank the distribution of all the income to the 6 grandchildren, the income accounts have built up gradually over the years to a substantial amount and the accumulation period ended this year on 2nd April this year. Can the undistributed income be added to the capital accounts now? Presumably all the income needs to be distributed in future even if the trustees incur additional tax?
Whilst, for tax purposes, the values used will be as at 10 April, for distribution purposes it is the value as at the date of distribution – the beneficiary is entitled to their proportionate share of the trust fund until that entitlement is fully satisfied.
It is generally easier for the trustees to transfer to the beneficiary their proportionate share of investments and balance out using cash.
The CGT payable on the beneficiary becoming entitled against the trustee is a liability of the beneficiary’s share (unless held over), as will be the IHT liability.
The trustee’s liabilities accruing before 10 April, including the tax due on the income but not yet assessed, will be shared between all the beneficiaries.
As regards the tax pool, if no income distribution was made to the beneficiary now of age before they attained 25, the benefit of the entire pool remains for the other beneficiaries.
The question of what now happens to the accumulated/undistributed income may well depend upon the precise wording of the trust deed.
With regard to the income arising after the end of the accumulation period, many trust deeds provide for this to be subject to the trustee’s discretion rather than vesting in the intended beneficiaries before they attain the specified age, so it will be necessary to review the trust deed to identify what should now happen to it.