Loans & Gifts from Discretionary Trusts
Deciding whether to make loans & gifts from Discretionary Trusts is an important part of the Trustees’ exercise of powers for a Discretionary Trust.
Discretionary Trusts are generally described as ‘protection boxes’ in which assets are protected and then passed to chosen people (beneficiaries) so that they benefit in the best and most efficient way. The Trust is often designed to protect inheritance value for the beneficiary against ‘attack’ or ‘claim’ on the value received by the beneficiary. That protection can be in the form of any of the following:
- protection of the wishes of the parent that assets pass down ‘family lines’ from children to grandchildren/great grandchildren,
- protection for the beneficiary against a future divorce after assets are inherited/received,
- protection against a future bankruptcy/insolvency of beneficiary
- ringfencing assets from being subject to Inheritance Tax on the death of the beneficiary and/or care fees claims during their lifetime.
Whilst protection from any or all of the above is desirable, it is also usually equally desired by the parent that there shall be little or no impact on the beneficiary/child in their own ability to use or spend the inheritance. The parents wish for ‘full use’ but with as much protection as possible from outside attack on the assets passed down.
Consider Loaning rather than Gifting
The usual best method of providing both ‘full use’ and yet some ‘protection’ is by making a lifelong loan to the beneficiary instead of making an outright gift. The ‘loan’ becomes attached to the beneficiary’s net assets as a liability and thus provides a degree of protection which an outright gift does not provide. The loan although repayable in law, it is usually not enforced by the Trust until the death of the beneficiary, whereupon it is usually designed to pass down the beneficiary’s family lines (for a child, it would be to their own children – ie the grandchildren of the parent). If there are insufficient assets to repay the loan, then so be it, the amount of loan that cannot be repaid is ‘written off’ by the Trust.
Administering Trusts is an important task and responsibility. It is often a matter delegated to an experienced, trusted advisor who can provide stable, independent, expert attention to the best way to ensure the wishes are fully protected.
Please see our Loans & Gifts from Discretionary Trusts Guidance Notes for further information.
