GENERATIONAL TRUST PLANNING AND ADVISER CHARGING Jim Callaghan Business Development Manager – Guarantee Sales

Learning Objectives By the end of the session you’ll be able to explain IHT Planning through Loan Trusts and Discounted Gift Trusts The technical details of these trusts The interaction of trust planning and adviser charging

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

A.10% B.25% C.33% D.50% The number of estates hit by IHT in 2014 will increase by?

A.10% B.25% C.33% D.50% The number of estates hit by IHT in 2014 will increase by?

UK £62,000 South East £77,000 London £81,000 IHT Threshold £150,000 UK £251,000 South East £305,000 London £424,000 IHT Threshold £325,000 Source: Office for Budget Responsibility

Why? It isn’t just about IHT planning…. …. it’s about control: Who gets the money When they get the money How they get the money Avoiding the need for probate But let’s not ignore the tax benefits

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Bare or Discretionary? Bare Potentially Exempt Transfer Outside estate after seven years Beneficiaries and shares cannot be changed Legal entitlement at 18 – 16 in Scotland Discretionary Control over who and when Chargeable Lifetime Transfer (IHT100) 20% Lifetime Charge (= 25% if Settlor pays) on excess over £325k Nil Rate Band

1.Yes please 2.No thank you Handset Question: Would you like more information on the changes to 10 year and exit charges?

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Gift Trust Simple Outright Gift Capital No interest for Settlor Parents to children Grandparents to grandchildren Popular for school fees/educational funding

Gift trust (bare) Gift £ Settlor makes gift into trust Absolute beneficiaries:  Can’t be changed  Entitled at age 18 (16 Scotland)  Not settlor though Growth outside estate from day one. IHT free. Trustee PET Outside estate after seven years.

Gift trust (bare) Gift £ Settlor makes gift into trust Absolute beneficiaries:  Can’t be changed  Entitled at age 18 (16 Scotland)  Not settlor though Growth outside estate from day one. IHT free. Trustee PET Outside estate after seven years. Gift trust (discretionary) Range of beneficiaries:  Children/Grandchildren  Spouse or former spouse  Not settlor though CLT NRB back after seven years. Potential 20% tax, 10-year & exit charges

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Loan Trust Settlor retains right to return of capital Freezes IHT liability No Gift element, so no PET/CLT All growth immediately outside estate Income stopped/started at any time Slower-burn Appropriate for younger settlors – parents to children

17  Peter is 45 and in poor health  Needs to think about IHT planning  Also wants to supplement income  He sets up a £200,000 Discretionary Loan Trust  Trustees have a number of investment options:  Deposit Account  OEIC/Collective Investment  Single Premium Bond

18  Highest bond value = £220,000  Dies after year nine  Cash-in value on death is £70,000  Bond pays out £130,000  After consideration, Trustees invest in a Unit Linked Guaranteed bond:  Certainty of £10,000 p.a. income for a minimum of 20 years  Range of risk graded funds  Enhanced death benefits

19 Without ProtectionWith Protection Investment Amount£200,000 Payments Received£90,000 Outstanding Loan£110,000 Death Benefit£70,000£130,000 Shortfall on Loan£40,000Nil 40%£44,000 Capital left to Children£26,000£86,000 Trustee LiabilityYesNo

Trustees SettlorBeneficiaries Income IHT efficiency Legacy Repayment of loan Investment strategy Minimum responsibilities IHT efficiency Legacy Tax efficiency

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Discounted Gift Trust Settlor retains right to regular income stream Single or joint (spouse or civil partner) Fully underwritten Discount based on age, health and income (but not gender) Discount on death within seven years Appeals to older ages – grandparents to grandchildren

Clive and Alice Jenkins retired couple Nil rate band allowance used £250,000 of investments each Potential IHT of £200,000 Need £20,000 income per year Leave money on death for grandchildren Discounted Gift Trust

Joint Life Bare Discounted Gift Trust for £500,000 Total discount = £260,009 Potential IHT saving = £104,003 4% income = £20,000 per year Income to survivor on first death Beneficiary access on second death Discounted Gift Trust

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Taxation of a bond held in Trust The “Pecking Order” (S467 Income Tax Act 2005) The Settlor where alive and UK resident (and also in tax year of death). Marginal rate. Possible top slicing relief UK-resident Trustees following tax year of settlor’s death or where settlor non-UK resident. Liable at rate applicable to trusts – 45% - no top slicing relief Where trustees non-UK resident, the Beneficiaries to the extent they have benefited at their marginal rates However, assignment to Beneficiaries may be more tax efficient Bare trusts are exception to this rule, as gain assessed to tax on the Beneficiary, subject to anti-avoidance provisions

Gift (Disc) Gift (Bare) Loan (Disc) Loan (Bare) DGT (Disc) DGT (Bare) Income  Access  Control    IHT

Trust Planning Decision Tree

1.Yes please 2.No thank you Handset Question: Would you like a copy of Aegon’s Trust Decision Tree?

Why Single Premium Bonds? Single Premium Bonds = Non-income producing asset Administration simplicity Income tax deferred until a chargeable event occurs – can use assignments No tax on Fund switches No income tax using 5% withdrawal facility No further tax on underlying income Wide variety of trusts Certainty of returns with Unit Linked Guarantees (Income, Capital, Death) SINGLE PREMIUM BOND

Agenda Bare v Discretionary Trusts Gift Trusts Loan Trusts Discounted Gift Trusts Taxation Adviser Charging

Adviser charging Watch out for pitfalls – particularly GWR Landscape has changed post-RDR

£ Trustees Beneficiaries Settlor is the adviser’s client – i.e. the person with the wealth, however… …on the gift of capital to a trust, the Settlor cannot benefit in anyway from the trust fund – i.e. any adviser charge for managing Settlor’s affairs. Adviser can have a separate relationship with the trustees to provide advice. These will likely be the children or grandchildren of the settlor. Key Point The settlor could be a trustee – however they would be dealing with the adviser in a different legal capacity Settlor Step 1 Step 2 step 3

Settlor £ TrusteesAdviser Initial fee for adviser on recommending trust planning Ongoing fee for adviser on reviewing other personal assets What is the easiest way for the adviser to be remunerated for the services to his client? Initial fee for adviser on recommending trustee investments Ongoing fee for adviser on reviewing trustee investments. Potential for ad-hoc payments for advice to the trustees. These are the Adviser’s remuneration options – not all may be met from the product

Initial Adviser Charge Use Pre-Investment option where available –Premium is the Contribution less the IAC –Gift/Loan into Trust is the Premium –Settlor not seen to benefit from trust property If only Post-Investment IAC facilitated: –Settlor must pay adviser directly out of own funds –Or, initial advice recorded as provided to the Trustees –Will be part of first year’s 5% “income” allowance –Gift/Loan into Trust is the Contribution/Premium Existing bonds –Owned by Settlor can be assigned into trust (Gift Trust only)

Pre-investment – Settlor IAC Settlor’s cheque: £100,000Initial Adviser Charge: £3,000Bond Investment: £97,000Gift into Trust: £97,000 Loan Trust – Loan to be repaid is £97,000 DGT – Income and discount calculated on % of £97,000

Pre-investment – Trustee IAC Settlor’s cheque: £100,000Bond Investment: £97,000Initial Adviser Charge: £3,000Gift into Trust: £100,000 Loan Trust – Loan to be repaid is £100,000 DGT – Income and discount calculated on % of £100,000 DGT – Income will be lower in year one

Ongoing Adviser Charge Will count towards the 5% p.a. “income” allowance 0.5% OAC = Max 4.5% “income” Avoid fund-based OAC Bonds assigned into trust by Settlor will need new OAC agreement signed by Trustees OAC paid from Loan Trust by Trustees will not reduce the outstanding loan OAC paid from DGT by Trustees will reduce the Settlor’s income for discount purposes

Conclusion The benefits of trust planning are just as relevant in the post-RDR environment… … but the consequences of getting it wrong can be serious Ensure you check which options your provider facilitates Unit Linked Guarantees can add an additional level of certainty to trust planning

1.Yes please 2.No thank you Handset Question: Would you like more information on how Unit Linked Guarantees can help with Trust Planning?

Learning Objectives By the end of the session you’ll be able to explain IHT Planning through Loan Trusts and Discounted Gift Trusts The technical details of these trusts The interaction of trust planning and adviser charging

42 Thank you Jim Callaghan Business Development Manager – Guarantees aegon.co.uk Aegon is a brand name of Aegon Ireland plc. Aegon Ireland plc, registered office: 2 nd floor, IFSC House, Custom House Quay, Dublin 1, Ireland. Registered in Ireland (No ). Authorised by the Central Bank of Ireland and subject to limited regulation by the Financial Services Authority. Details about the extent of regulation by the Financial Service Authority are available from us on request. An Aegon Company. © 2014 Aegon Ireland plc