Discounted Gift Trusts

Hi all

I've taken on a case for something I've never dealt with before, and I think this is going to be a steep learning curve! Can you tell me which providers have the best technical resources for DGTs and IHT planning?

The case is for an elderly couple with an estate worth around £2.5m (so no RNRB). I'm reading through a previous report, and it would be useful to know as much as possible about DGTs and estate planning, especially as I may be required to come up with solutions (yes, I have wondered what I have got myself into, but I like a challenge!!!)

Comments

  • CaroCaro Member

    Hi Andy, has it already been decided that the DGT is the best option or are you just looking at all available options at the moment? These are fairly inflexible arrangements so need to be approached with great caution!

    Naturally, the most appropriate solution will depend on their needs, goals and situation - have they got a need for income? I've seen so many cases in the past where a DGT was recommended but the income is not being spent and is building up in the estate, and because of the inflexibility of these types of arrangement, there is very little that can be done.

    Canada Life and Pru are usually very good for this sort of technical help, but there's also the CII exam J02 text book - if you are a PFS member you can access this on their website once you've signed in.

    Hope that helps.

  • Hi Andy, sounds like an interesting case. As Caro said DGT's can be a great solution but in a number of cases I've come across the need for income can change over time and because theDGTs are so inflexible they become less tax efficient as the years pass. A Foresight we have some planning ideas for this exact situation and a quick video can be seen here

    We also have some planning ideas that look and feel like a DGT (still provide income, still mitigate IHT immediately) but have the flexibility to be reversed if you need. I'll happily send you some bits over if you'd like me to.

    Jenny

  • A transferred RNRB would be available (assuming estate is reasonably equally split). This gives £350,000 of RNRB on second death. £2 for £1 reduction means estate would get some relief on estate value of up to £2,700,000. (Assuming property value/beneficiaries etc qualify).

  • @Jenny_ForesightGroup in your video it suggests a £700,000 investment (I assume to reduce the estate to the point that the RNRB becomes available). If this is then gifted after 2 years would this not become a CLT and therefore chargeable for 20% lifetime IHT?

    If the estate value is lower (eg around £2,644,000) they could invest less, so could the (say) £650k gift become a PET (or would the husband and wife need to do one each at £325k)?

    A DGT was advised but not taken up at the time (I think jittery client due to the sum of money involved) and the adviser is looking to reduce the investment amount to around one-third of what it would be to make it the most efficient.

  • TomLloyd_ReadTomLloyd_Read Member
    edited June 3

    Hi Andy

    Because the investment qualifies for a 100% business relief exemption, assuming it has been held for two years, it effectively has no transfer value, and therefore you can transfer whatever you like into the trust (i.e. you aren't limited to £325K each). It is quite neat, but there are some catches to be aware of e.g. the trust should continue to hold the BR qualifying investment, or a replacement, for at least 7 years after transfer for instance as it could come back into play if the donor dies within 7 years of the gift.

    Overriding all of this is suitability, and BR investments are higher risk and not going to be suitable for everyone. I'm not sure we'd be advising a client to invest 25%+ of their wealth in a BR investment, unless they had serious ill health issues and it was a last roll of the dice.

    It is also worth looking at the Canada Life International Wealth Preservation Account , and the Quilter International equivalent, as these offer some of the benefits of a DGT (although no immediate estate reduction) with a bit more flexibility in terms of income/access to capital.

    Cheers

    Tom

  • benjaminfabibenjaminfabi Moderator
    edited June 3

    I like the Intelligent Partnership guide to estate planning - free download from their site, (along with a lot of other useful guides, btw).

    The combination of 'elderly clients' and DGT immediately gives me concern. As the transfer for IHT is based on the premium less the current value of the future income payments, an elderly couple won't get a big discount. Also, with an estate of £2.5m, do they need an inflexible income that isn't really income (so can't be gifted)? Are they already spending everything they have coming in? If they aren't, they will just accumulate the 'income', as @Caro says. If they do this, then the DGT is the worst solution available.

    You then have:

    • Gift to trust using some/all NRB for 7 years with a very small immediate benefit (often little if any more than the 7 year cost of ownership of the DGT).
    • An income stream coming back into the clients, that they can't gift and if they don't spend, increases the taxable estate.
    • An ongoing requirement to review the investments.

    Estate planning at this level is very technical and can get very complicated, very quickly. Insurance is nearly always the most appropriate and most straightforward option, often combined with outright gifting.

    Be wary of adviser responses such as:

    • "they don't want to pay for insurance" (but they don't mind paying adviser fees, the DGT provider fees, the investment fund charges etc?) - Do a comparison of the true difference in cost.
    • "they don't want to give away the cash now" - Have they been asked? Has it been modelled? Specifically why don't they want to gift the money. Specifically (eg because the last time we gave [child] £35k s/he wasted it on xxx)
    • "they might need access in the future" - Will they though? Do a proper cashflow before you recommend a FRIT/loan trust.
    Benjamin Fabi FPFS
    Chartered Financial Planner
  • CaroCaro Member

    I agree with everything @benjaminfabi and @TomLloyd_Read have said. There are so many factors to think of with estate planning particularly when using BR products and trusts.

    Where there is irrevocable gifting, my view is a cashflow should be done in every case to assess affordability not just now but in the future.

    There is also, as Ben said, the issue of health when it comes to gifting - what is their health? Are they likely to survive for seven years? How would this impact on any discount offered for a DGT or the 2 year holding period for BR.

    With health issues, there is also the question or potential care needs. If they are elderly, what is the likelihood they will need care? Has the cost of this been modelled? Care home fees could quite easily impact on an IHT position if good quality care is needed for a prolonged period. Has this been taken into account with any analysis of how much could / should be gifted.

    As Ben said, this type of planning and advice can get very complicated very quickly if you're not on top of all the potential moving parts. Whilst I applaud your enthusiasm for a challenge and wanting to learn, if you don't feel fully confident with this type of planning and advice, it can be quite easy to get yourself into a bit of a pickle, even if you have a lot of experience with it.

    Ben's points for challenging why not use the simplest methods of planning are really key, often the simplest solution is the most appropriate, but as Tom says, suitability overrides everything to make sure the client is not disadvantaged or stuck in an inflexible arrangement.

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