Does it make any difference when doing a deed of variation for IHT purposes into a discretionary trust, whether the discretionary trust is contained in the same document as the deed of variation, or in a separate trust created after death into which the deed of variation redirects the assets?
Do they need to be signed on different days? I am going round in circles. My preference is to create a separate trust and for the deed of variation to simply redirect the beneficiary’s entitlement into the new trust. The beneficiaries of the trust will be the original beneficiary, spouse and issue. I understand the position is different for CGT and IT as it’s by way of variation and not from the original Will of the deceased.
Both approaches work, but if the deed purports to redirect the inheritance to a trust contained in a separate document, I would have thought that this separate trust would need to be executed and constituted prior to the deed of variation being signed - how can you redirect a gift into a trust that does not exist at the time of signing?
Which approach you use will depend on the circumstances. A very simple trust (such as a fixed interest trust) is probably better included in the body of the deed of variation, as this will reduce the number of documents floating around. A more complex trust may be better off as a separate document, especially if the trustees anticipate receiving assets from other sources (such as on the death of the person currently executing the deed of variation), as this will allow examination of the trust document/powers without reference to the original gift.
A separate trust is fine, of whom the settlor for CGT and IT will be the original beneficiary, as you say. It can be dated before or the same date as the DOV.
I would be concerned that a separate trust would mean amending the will to redirect assets into a settlement that did not exist at the date of death. It may be possible (there are already oddities such as retrospective severing of joint tenancies) but essentially, under the IHT and CGT fiction, you would be reading back a provision that transferred assets into a non-existent settlement. As well as sounding odd, it could have some unforeseeable consequences.
I would have thought it much safer to set out the new trust terms in a schedule to the deed of variation so that it can all be imported into the will and read back to the date of death for IHT and CGT purposes.
I have often recommended that when a beneficiary varies their
entitlement by settling it into a trust, that the variation and trust
deed are in separate documents.
One reason for this is to maintain the confidentiality of the terms of
the trust. Does the beneficiary want the other parties completing the
variation to know who they’re benefiting?
As regards the order of execution, yes the trust deed needs to be
executed before the variation. Usually they are executed the same day
with the recitals to the variation confirming the trust deed was
executed immediately before the variation. The gift under the variation
might be to A and B, the trustees of the settlement made by X
immediately before the execution of this deed, to be held upon the
trusts of that settlement.
If the beneficiary is not the only beneficiary of the estate, you might
consider warning them that if any of the other beneficiaries also create
a settlement by deed of variation, the settlements might be "related"
for IHT purposes, with adverse implications for the calculation of
periodic and exit charges.
As far as I am aware, the ‘legal fiction’ created by the deed of variation (ie, the IHT and CGT treatment) does not require the new beneficiary (whether a trust or otherwise) to be in existence at the date of death, or the date of the execution of the will. The special status afforded to deeds of variation does not change the actual gift taking place (from the original beneficiary under the will to the new beneficiary), simply the tax treatment.
Taurean Drayak
Elliot, Bond & Banbury
Taking up the point raised in Andrew Goodman’s email, there is no problem in setting up a separate settlement which did not exist at the time of the will/death.
To be clear, you can:
Set up a trust in the DoV itself
Set up a trust after the death and before the date of the DoV and redirect the gift to that trust when you sign the DoV
Redirect the gift to a trust which was in existence at the date of death (assuming it can accept additions)
Truth may be stranger than fiction, but in relation to DoVs, the fiction is pretty weird itself!
This issue seems to raise its head from time to time and it seems still causes different views to be expressed.
There is no reason why a DoV cannot redirect inherited property into a trust even though that trust was not in existence at the date of death. The trust may be created either within the DoV or prior to the execution of the DoV.
The so-called “reading back” is simply a tax fiction treating the deceased as having made the gifts whereas in fact in the real world the gift is made by the person executing the DoV.
Does it make a difference to the commencement date of the Trust?
I am clear that a Trust contained within a Deed of Variation is deemed to begin on the date of death but what about one whose Deed is a separate document executed before the DoV?
Where a trust is created by deed of variation, the start date of the trust, for all reasons other than inheritance tax is the date of the deed.
Any class of beneficiary will be as at the date of the deed, and not as at the date of death. Whilst this may not often be relevant, if the variation is being used, say, in a “double death” situation - to ensure the trust accurately reflects the terms and beneficiaries applying on the second death the wording used must create the same beneficiaries, and not just repeat the wording from the later will (which could result in the class of beneficiaries including persons who have died between the 2 deaths, and excluding any who might otherwise have become beneficiaries by being, say, born or adopted between these two dates). Such a disparity could result in HMRC rejecting the application of s.142 IHTA 1984 and s.62(6) TCGA 1992.
Where a settlement is made and assets diverted to it by deed of variation, again, it is only for IHT purposes (if the appropriate declaration is made) that the trust is deemed to have commenced on the date of death. For all other purposes, it is the date of the settlement deed that is relevant.
I am sorry to revive this topic after such a long period of time. Appreciating that these issues are reoccurring, it seemed more efficient to pick this up again so contributors would not have to reiterate previous helpful comments.
I am reviewing historical papers relating to a 22 year old planning matter. A lifetime discretionary trust was created with the settlor (the son) contributing £10, he was named within the class of beneficiaries. A few days later a variation redirected all of his entitlement from his father’s estate to that same trust. Son has continued to enjoy a benefit from those assets to date and there is significant value, well in excess of the NRB.
I understand that for IHT purposes each contributor to the trust will become a settlor and, accordingly, the fund would be apportioned appropriately for say 10 year / exit charges. In view of this, I may have answered my own question.
I am struggling to muster confidence that the full value will not be aggregated to the son’s estate as a GWROB as the son is clearly named both as settlor and as beneficiary, despite him contributing only the original £10.
Have any practitioners seen this planning structure accepted or thrashed this point out successfully with the revenue, and has the fiction of the variation provided a sufficiently protective shield?
Thanks for reviving this, it was my original post back in 2017 and I’m afraid I don’t have a confident answer either. I’d also be very interested to hear from anyone who has tested the point with HMRC in practice.
S.44(2) IHTA mandates notionally separate settlements where there is more than one settlor within s.44(1).
If reading back is elected under s.142 the deceased is the settlor for IHT of the funds thereby injected into the settlement and the son is the settlor of £10 plus any subsequent growth in value attributable to it.
IHTM42253 confirms that HMRC accept that although, like the statute, is parsimonious about the mechanics of the obvious consequences. Possibly HMRC are prepared to accept, though not publicly or on every occasion, that such a disproportionately small amount of the son’s fund can be ignored as de minimis. This would require common sense so it does not augur well. In such circumstances I would inform HMRC that no returns of exit or TYA charges on the £10 fund are going to be made by the trustees.
If the son is an eligible beneficiary of the £10 fund there is a GROB in it but surely this can be got rid of by either excluding him from that fund (he could exclude himself unilaterally by a deed of disclaimer) or by exhaustively appointing this fund to him or another beneficiary. This would be a PET under s.102(4) FA1986 but might well be within his s.19 annual exemption, though not apparently within s.20 as it is not “to any one person”. Even though the trust may well specifically provide for only one single class of eligible beneficiaries in relation to the total trust funds, for IHT s.44(2) requires that his eligibility is deemed to be in two distinct funds. Any document should indicate the statutory background as an explanation for its dealing with one notional fund of the two.
Note that s.68C TCGA where reading back is elected under s.62(6) makes the settlor for CGT of the larger funds injected by the variation the person who would have inherited them but for the variation.