Trusts: Case Studies

Meet Tom Anderson
Tom Anderson is 48 and, although uK domiciled for IHT purposes, he now lives in Kenya. He married at 21 and, within four years, owned his own company. By the age of 27 he had two children and had amassed a personal fortune of £8,000,000. However, his subsequent divorce cost him 50% of what he had previously considered to be his hard-earned personal wealth.

The Trust solution
Pryce Warner International Group recommends establishing a Trust governed by Guernsey law. Guernsey Trust law significantly enhances the defence of a Guernsey Trust against foreign law based attacks on the validity of the Trust. Pryce Warner International Group suggests setting up an International Portfolio Bond* written subject to a Discretionary Wealth Protector Trust for the benefit of his children. Tom himself is not to be a Beneficiary. The Trust is established with professional Trustees in Guernsey to manage it.

What has been achieved?
Ten years on, Tom remarries. unfortunately, after a period of time, this marriage also fails and Tom goes through another divorce. However, because he had transferred money into the Discretionary Wealth Protector Trust for the benefit of his children well before he met his second wife, and because Guernsey law excludes the application of foreign law to Guernsey Trusts, he successfully protected the International Portfolio Bond for the benefit of his children.

The information in this case study is for illustrative purposes only and should not be relied upon for decisions relatingA to your individual circumstances. By giving this information, Pryce Warner International Group is not providing legal or tax advice. Pryce Warner International Group recommends that professional tax advice relating to your individual circumstances and tax position should be sought at all times.

Meet Bob Burrows
A 60 year old widower, Bob Burrows is currently working for a petrochemical company in Dubai. He loves his job and has no intention of retiring until he is 65. He then plans to return to England and spend his retirement in Cornwall. Bob has one child, Antonia, who lives in London with her husband, Henry, and their twins, Paul and Angela. Bob had a stroke of good luck with a windfall of £500,000. As he is uK domiciled, he understands that this could create an inheritance tax (IHT) problem, as it will take his worldwide assets above the uK Nil Rate Band threshold*. He therefore consults Pryce Warner International Group.

Bob's needs
Bob speaks to Pryce Warner International Group and he tells them that he wishes to spend £200,000 on luxuries for his retirement. As he is financially secure, he does not need access to the remainder of his windfall and wants this to be an inheritance for his family.

The Trust solution
Pryce Warner International Group recommends he invests £300,000 in a Portfolio Bond with the Portfolio Bond placed in a Discretionary Gift Trust and that Bob should be the life assured. Bob should also be co-trustee along with his two brothers.

What has been achieved?
As Bob is uK domiciled for IHT purposes, the transfer into the Discretionary Gift Trust is seen as a uK Inheritance Tax lifetime transfer. As Bob has not made any transfers in the past, he makes use of the uK Nil Rate Band threshold* and, therefore, in this case no uK IHT is payable. Five years on... Bob turns 65 and returns to England, retiring to Cornwall as planned. Two years into his retirement he discovers that one of his grandchildren is having learning difficulties. After discussing the matter with his family and Trustees, they decide to advance capital of £20,000 to cover specialist education fees. Because the advancement is within the cumulative 5% annual withdrawal limit of an insurance bond, there is no uK tax liability on this part surrender.

Five years after retirement ... Bob is delighted with the performance of the Portfolio Bond, however it has grown to a value greater than the uK Nil Rate Band threshold* for inheritance tax. As the Trust has now been in existence for 10 years, the Trustees advise that a 10 year charge† to inheritance tax is now due on the value of the Portfolio Bond over and above the uK Nil Rate Band A threshold*. The Trustees calculate the charge and make a part surrender from the Portfolio Bond to pay the tax bill.

Two years on... Bob dies. As he was the life assured on the Portfolio Bond, the proceeds are distributed to the Beneficiaries by the Trustees. Because the transfer into the Portfolio Bond happened more than seven years ago, there is no uK IHT payable as a result of Bob's death and Bob's designated Beneficiaries receive their inheritance. Income tax will be payable on the profit element of the Portfolio Bond and there will also be a small inheritance tax distribution charge when the proceeds are paid to the Beneficiaries, but these charges are small compared to the inheritance tax that would otherwise be payable on Bob's death.

The information in this case study is for illustrative purposes only and should not be relied upon for decisions relating to your individual circumstances. By giving this information, Pryce Warner International Group is not providing legal or tax advice. Pryce Warner International Group recommends that professional tax advice relating to your individual circumstances and tax position should be sought at all.

Meet John and Gail Kemp

John and Gail are in their early 40s, live in Mexico and have three small children under the age of 10. John has recently had a health scare but the prognosis for a full recovery is extremely positive. John and Gail Kemp

John and Gail's needs

The scare has made the couple anxious to seek professional advice to ensure the best management of their finances and to put in place financial planning for their three children. They have an amount of £60,000 to invest now and believe that they will be in a position to add to this in the future.

Meet Jill Thompson

Jill Thompson is 60 and just about to retire from her job as a Senior Manager with a multi-national company Kong. Jill is very active and is looking forward to travelling and re-igniting her passion for sailing. Jill owns a holiday home in her native Bognor Regis, in England, in which she intends to spend six months of every so that she can be close to her two daughters, Lorraine and Mary. Her daughters have two children each.

Jill's needs

Jill will have a pension in payment of £60,000 p.a. However, because of her active lifestyle and costly interests, she estimates that it will take another £10,000 p.a. for her to be comfortable in her retirement. Jill also has £200,000 in her bank account and realises that this, combined with the properties she owns, will create a potential uK inheritance tax (IHT) issue that she would like to avoid. Jill also wants to make sure her grandchildren are well looked after later in life.

The Trust solution

Following a discussion with Pryce Warner International Group, Jill decides that she should start inheritance tax planning as soon as possible but, as she needs additional income over the next few years to support her active lifestyle, she cannot afford to give all of her savings away immediately. Pryce Warner International Group recommends that her £200,000 be invested in an International Portfolio Bond written subject to a Discretionary Loan Trust. Pryce Warner International Group set up the Discretionary Loan Trust with professional Trustees. Her grandchildren are to be Beneficiaries of the Trust. Jill lends the Trustees £200,000 to invest in an International Portfolio Bond and she is to be the sole life assured. Jill requests that the loan is interest free and she requires repayment of the loan at 5% of the original £200,000 loan per annum.

What has been achieved?

The loan repayments from the International Portfolio Bond provide Jill with the additional annual income of £10,000 she needs and, as they equal 5% of the loan amount, no uK tax is paid on the withdrawal in the uK.If Jill lives to the age of 80 (i.e. 20 years at 5% per annum), the loan will be fully repaid, no uK tax will have been paid and the remaining value of the Portfolio Bond will be completely outside her estate for uK tax purposes. If, on the other hand, Jill dies before the loan has been repaid, the value of the outstanding loan is added to the value of her estate and not the total value of the Portfolio Bond. This means that any growth in the Portfolio Bond is automatically outside Jill's estate for uK tax purposes and is, therefore, free of uK IHT.

Jill also has comfort in the fact that she knows that her grandchildren will be well looked after later in life.

The information in this case study is for illustrative purposes only and should not be relied upon for decisions relating to your individual circumstances. By giving this information, Pryce Warner International Group is not providing legal or tax advice. Pryce Warner International Group recommends that professional tax advice relating to your individual circumstances and tax position should be sought at all times