Vulnerable Persons Trust Default Beneficiary

Trusts Discussion
1

I have a client who is wanting to create a Vulnerable Persons Trust for her son during her lifetime. If he were to die before her and before the Trust is wound up, she would want any remaining assets to revert to her and therefore name herself as a Default Beneficiary. Does that cause the VPT to be settlor-interested and remain part of her Estate for IHT purposes? Does it cause other issues with income tax etc?

In addition, if she were to be named as one of the Discretionary Beneficiaries who could benefit from the 3% or £3,000 is that again an issue for IHT purposes?

Any thoughts would be welcomed.

2

IHT

Happy to be shot down in flames here, but I think that the IHT treatment depends upon what sort of interest the settlor retains. In either instance, it is assumed that the Vulnerable Person (VP) obtains a qualifying disabled person’s interest under the trust (as defined in IHTA84 s.89).

  • If the settlor is one of the discretionary beneficiaries, then I think that, despite the VP obtaining a qualifying IIP under the trust, the gift would fall under the GROB provisions such that the trust property would continue to be comprised within the estate of the parent for IHT purposes (as well as being within the estate of the VP for IHT purposes). This is the same position that would have existed before the 2006 changes to trust legislation.
  • However, if, upon the demise of the VP, the trust property reverts to the parent (IHTA84 s. 53(3)) or their spouse (IHTA84 s.53(4)) absolutely, then I believe that this is one of the few instances where the old “Reverter to Settlor” (RtS) provisions still apply – i.e. the Revenue regard this as a carve-out during the settlor’s life – i.e. the trust funds are not comprised in the settlor’s estate for IHT purposes for the lifetime of the beneficiary. Here, it is also worth noting that despite the VP’s interest being a qualifying IIP, if the VP dies before the settlor/settlor’s spouse, the trust assets will be exempt within the VP’s estate for IHT purposes because of the operation of the RtS provisions.

Income Tax

I think that FA2005 s.25(3) is the key here and I think catches both of the above scenarios – the type of interest that the settlor retains being defined in ITTOIA2005 s. 625 – i.e. no special tax treatment is available if the trust permits accumulation or, if the VP has an actual IIP, the income remains assessable on the settlor regardless.

3

Thanks for your thoughts here Paul. It is much appreciated.