Settlor Interested Discretionary Trust

Hi all,

Situation is this - client set up a US lifetime Trust. Terms of the trust as basically:

  • During Settlors lifetime, the trustees have discretion to advance income and capital to Settlor
  • On Settlors death, beneficiaries are nieces and nephews.

Settlor and Trustee are the same, but the discretion sits with the Trustee.

The Trust asset is a UK property bought by the trust in 2017. Client is now wanting to transfer the property into her personal name.

I’m thinking RPR with exit charge (and question mark whether there should have been a CLT in 2017 too?). I note @paul commented about this, and warned re US advisors pushing people into doing these types of living wills, in a post back in 2017. If this is right, how many unsuspecting people have done this?

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I’m not overly familiar with such trusts but clearly Paul is and no doubt he will comment on my comments (as indeed so may others).

The appointment of the property out to settlor/beneficiary creates an “exit” charge for IHT.

In addition, any capital gain/loss arising on the appointment is the liability of the non-UK resident trustees under the new non-UK resident CGT provisions re UK real estate at a 20%/28% rate.

If the trust is not UK resident but the settlor is UK resident (and UK domiciled) and the appointment was of property not comprising real estate and with a non-UK situs any capital gain/loss arising on the part of the trustees on a disposal would be subject to UK CGT on the settlor’s part under TCGA 1992 s86.

Malcolm Finney

Thank you Malcolm, I think this is the main problem I’m having - trying to ascertain what type of trust it is. If it is RPR then like you say the taxes apply. A further point I missed above is that the Settlor can revoke the trust at any time - so does this take it into bare trust categorisation…as opposed to RPR. There’s a chunk of tax riding on the outcome of that answer!

If this is the usual style of US “living will”, if made by an individual with a domicile within the UK, or includes UK assets, and is made on or after 22 March 2006, it will invariably be within the UK IHT relevant property regime. Accordingly, there will be potential entry, periodic and exit charges depending upon the value of the assets within the trust at the relevant time.

Whilst many of such trusts reserve to the settlor a power to revoke, that does not cause the trust to be outside of the IHT relevant property regime. If the settlor exercises their power of revocation, an exit charge may well arise.

It seems that not only are US Persons being encouraged to use this type of arrangement, regardless of where they might be living or the nature of their assets, non-US Persons (such as those with a domicile within the UK) who happen to be, say, working in the US are also being encouraged to use them (apparently without regard to the potential tax issues that might arise in the jurisdiction in which they are domiciled).

If the settlor happens to be classified as “disabled” (for the purposes of IHTA 1984), the trust could come within s.89A IHTA 1984 and, thus, fall outside of the relevant property regime.

Living Wills, or living nightmare?

N.B. Mindful that people’s circumstances change, there is always the possibility that a living will was “appropriate/best” advice at the time it was entered into and subsequent events have undermined the benefits of such arrangement.

Paul Saunders FCIB TEP

Independent Trust Consultant

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The reasons for using a US style living will usually boil down to the avoidance of probate in the American States concerned.

The probate procedures in the USA are not necessarily to everyone’s immediate taste.

Hence the short cut proposed into the blind alley, as the Johnny Halliday or rather Jean-Philippe Léo Smet succession experienced.

Peter Harris

Not an expert on this (hence the vagueness of the following) but I believe there may be arguments applicable to some such trusts (depending on terms, circumstances and practice) that they are a nullity - on a similar basis to sham or illusory trusts but without the element of dishonesty - simply because the settlor continues dealing with “their” assets after making the trust just as they did prior to it.

Absent that, I agree the usual IHT and CGT rules applicable to settlements would apply.

What an absolute minefield! I have seen another one recently where the Settlor has a bare interest in the assets - so they are his and he decides what happens to them…but with instructions on what happens after his death. Would this still be a bare trust now and avoid the entry and other charges and become RPR when the settlor dies?

An unusual situation where knowing the reason for the request is important.
Avoiding taxation being important and if appropriate, would it be possible for the Trustees to Loan the property to the Settlor during lifetime to meet the need, or raise capital on the asset for the same purpose?

Client is now marrying a UK resident and so wants to be able to give the property to him in her Will in due course!

Also doesn’t want to revoke the whole Trust, just remove the UK property from it. The more this is feeling like an exit charge will result.

If the Settlor still wishes nieces and nephews to eventually benefit, would it not be better to grant a lifetime interest to the new husband keeping the nieces and nephews to eventually inherit, or are they to be cut out now? It would save a chargeable event.

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