A discounted gift trust (DGT) is usually set up in connection with an investment in either an onshore or an offshore investment bond or insurance bond.
A DGT allows for the gifting of a lump sum into a trust, while retaining a lifelong income from that money, which is technically one or more withdrawals of capital.
The main aim of the trust is to reduce the eventual IHT liability for the settlor on death.
If the settlor is considered to be in reasonable health, a calculation is made about the likely total amount of income that will be paid back to him by the trustees.
This is known as the discount and it’s deemed to be retained by the settlor.
The remainder will be treated like any other gift into a trust – such as a chargeable lifetime transfer (CLT) in the case of a discretionary trust, or a potentially exempt transfer (PET) in the case of a bare trust, falling outside the scope of IHT after seven years.
If the settlor dies within seven years, one might think that his retained discount should go to his personal representatives to form part of his estate. However, the HMRC tested and accepted IHT treatment is that this right to an income for life has no value once the settlor has died, and so no money has to be returned. The effect is that the discount is deemed to leave the settlor’s estate on day one of settlement of monies into the trust.
The rest of the money will be treated like any other gift into trust, and brought back into IHT calculations if death occurs within 7 years.
As a result of this, there is an immediate IHT reduction upon creation of a discounted gift trust, making it a powerful IHT planning tool for anyone in later life whose intentions are to draw income from their investments throughout their lifetime, then to pass on the remainder to their beneficiaries.
The discount rate is calculated based on both mortality rates for your age as well as on in depth medical testing to determine a fair discount factor for the gift based on the value of the retained revenue stream.
Through using a discounted gift trust you give up the right to the capital and can only access the income stream which is set at a pre-agreed amount and inflexible.
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A Discounted Gift Trust (DGT) can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis.
The case for using trusts in general also needs careful consideration on an individualised basis.
If you already have a trust structure in place and would like a second opinion - or, if you are wondering whether the utilisation of a trust could be of benefit in your personal circumstances contact our trust experts for comprehensive, highly qualified advice.
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