The settlor of a discretionary loan trust has died and has not left any instructions to waive the loan on death.
The beneficiaries of the trust, and the estate, are the same.
Apart from the executors needing to include the loan in the estate for IHT purposes, is it possible for them to agree for the trustees to assign segments of the bond directly to the trust/estate beneficiaries if the executors are happy that the loan is appropriated to the estate beneficiaries in the same proportions as the policy segments are to be assigned to the trust beneficiaries?
Or would this be deemed a gift to the trust and so use the deceased’s NRB?
Does the loan need to be physically repaid to the estate?
Any other considerations?
Thanks for any help.
What kind of bond and is it separate from the loan? More facts please
It is an onshore investment bond held in the discretionary loan trust.
The full loan remains outstanding, as well as the growth for the beneficiaries.
You have to be careful not to structure this so that the assignment of the bond is made in consideration of the release of the loan, or as repayment of the loan, because that will be treated as an assignment for value and potentially trigger a chargeable event. The exact course of action may depend on whether the beneficiaries intend to keep the bond or cash it in, but I think in the past I have done it by a series of documents including an appointment out of the trust onto bare trusts (if not a bare trust already), assignment of the debt from the executors to the beneficiaries, release of the debt by the beneficiaries, followed by the assignment of the policy to the beneficiaries. The final assignment has to happen after the debt has been released.
There really should be no problem here. As Diana says the key issue is that the assignment of the bond should not be for consideration. It is difficult to see how the beneficiaries furnish consideration for anything absent an Own Goal. Such an event would occur if the trustees committed (for a professional) “hari kari of the PI policy” by appointing the bond out on the basis that the beneficiaries assumed responsibility for the debt, especially as without a novation involving the settlor their personal liability on the debt would not be extinguished anyway if the beneficiaries failed repay it. They would have some right against them, if they were worth suing. It is of course entirely possible, as always, to muck the whole thing up by stupid drafting but I presume that is not intended.
An assignment chargeable event for consideration is to be avoided because:
(a) it is a chargeable event despite no actual surrender of the policy ;
(b) if the trustees and beneficiaries are “connected persons” the market value of the policy is chargeable regardless of the amount of actual consideration (they will be if the beneficiaries are “connected with” the settlor, if living);
(c) the primary income tax charge will be on the settlor, if living, or the trustees if not, and not on the beneficiaries and at their tax rates.
There are two discrete transactions:
1 The Settlor gratuitously forgives the debt by deed. This has IHT consequences of course. No consideration moving from trustees or beneficiaries.
2 The bond is appointed out gratuitously. This also has IHT consequences. No consideration as in 1 above…
This is a doubly reasonable course of action so the GAAR should not be in point.
Apologies. I missed that the settlor has died. This raise questions as regards who owns the loan and can they and will they forgive repayment. As they are or can be contrived to be the same persons it should be possible to assign the loan to them as Will beneficiaries, plainly no consideration. Then appoint the bond to them, again gratuitously. They then surrender the bond.
This however leaves the executors/will trustees in a strange position as their debt to the Settlor’s estate cannot be repaid or set-off. If it is part of the arrangement that the loan will then be forgiven it might look as if there is some kind of circular consideration moving from the beneficiaries. But if the bond is appointed subject to the trustees’ lien over it and its proceeds, that is not the assumption by the appointees of the trustees’ debt. If the proceeds are then used to make good the trustees’ lien who then repay the debt there would seem to be no consideration. It is hard to make out a case for consideration having paid if none is actually received.