Loans to beneficiaries

Colinstewart76

Hi all

I have been asked to comment on the following:

A client is considering assigning an existing offshore bond into a discretionary trust. The solicitor is recommending this as it will allow the Trustees to lend capital to the beneficiaries while, presumably, protecting the family wealth and ensuring that the capital does not end up in the beneficiaries' estates.

I don't have any specifics about the bond, the settlors, lives assured or value etc so I think the adviser is just looking for some pointers, aside from the usual things to watch out for from an IHT perspective. I think he's really asking is an Offshore Bond a suitable wrapper for the trust's assets.

So, what are the potential downsides of assigning the bond into a Trust which has the objective of making loans? I think I can think of a couple but would like some opinions too please:

• I suppose segments cannot be assigned to a beneficiary as that isn't a loan, so I guess a special loan agreement would need to be made (presumably the solicitor could write a suitable deed/agreement)?
• If segments are loaned to beneficiaries, that feels like a 'for money or money's worth' transaction, so it would trigger a chargeable gain on the Trust at the time?

All thoughts welcome please.

Many thanks
Colin

les_cameron

This is coming up fairly frequently at the moment. Someone must be plugging the idea at events or something!

I would imagine most standard trust documentation has the ability for trustees to make loans.

If the objective is you wanted to make a loan you could do it from your own funds why put it into trust first.

I think you'd need a substantive reason to use the trust.

Downside of trust is just standard stuff eh? Loss of access to it (presumably), trust admin, tax management etc etc

Whether onshore or offshore is best would obviously be down to who is going to be liable for the bond gains eventually. But in trust that can be a fair bit away so offshore is often good as gross roll up has time to kick in and you still have the flexibility to access beneficiary allowances If their circumstances change (or new ones arrive like grandchildren).

I agee loaning a segment is a chargeable event. So they need to convert the bond into cash to loan - who is the tax charge going to be on?

In my view, loans should be professionally documented as there are a lot of things to consider as you're having to deal with the trustees fiduciary duties, practicalities of interest or not, how it is all reclaimable etc etc and you want clear legal documentation if the beneficiary does get divorced or become bankrupt.

Finally, what's the point if it's a divorce protection point - why loan them the money? Just give them money they can spend if they need money to spend - why bother loaning them money if they do not need it?

richardgough

You dont lend segments. The trustees would need to surrender segments to raise cash (with the potential knock-on tax consequences) and then lend the cash to the beneficiary.

However, before that is even considered, the first question to ask & answer is 'Can the client afford to gift the asset? and 'Is gifting a sensible strategy for the client's planning objectives?'

If the client just wants to lend money to a beneficiary, then there is no need for a trust to 'sit in the middle'.

Colinstewart76

Agree with all of these queries. It needs a lot more scrutiny from a planning point of view I agree, and I don't have enough info on that (I already have a long list of those things to go back with that start with 'Why').

I am guessing the intention is to cascade the family's wealth, with the capital never being in a beneficiary's estate (I've seen solicitor marketing material to this effect) or, as Les suggests, protecting the funds from divorce/bankruptcy etc.

I think the loss of some of the planning advantages of a bond is, I think, what the adviser is looking for at the moment, and you've both more or less confirmed my thoughts.