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REVIEW SUMMARY

Gift Trust

A gift trust is a special legal and fiduciary arrangement that allows for an indirect bequest of assets to a beneficiary. 

A gift trust provides an IHT planning route for those who want to make an outright gift in a tax-efficient way.

Some individuals are averse to making substantial gifts directly to minors. For example, if they have young children, they may want the children to inherit the money at an age when they are more financially mature, or they may want to gift away money without affecting their spouse’s access to the funds.

Overview
FAQ
Customer Reviews
Expert Verdict

Key features of a gift trust:

  • A gift trust is a viable method to avoid taxes on gifts that exceed the annual gift tax exclusion amount.
  • A gift trust is typically used by parents or grandparents who want to establish a trust fund for their children or grandchildren.
  • A gift trust enables an individual to make a gift without relinquishing full control over the assets gifted.
  • The trust can be established with single or joint settlors, and a settlor is not automatically included as a trustee. Furthermore, the settlor is not a beneficiary.

Who the gift trust is suitable for:

  • The gift trust is suitable for individuals who are UK domiciled or deemed UK domiciled for IHT purposes and can afford to gift capital with no requirement for future access to it.
  • Alternatively, establishing the trust as a bare trust would be suitable for individuals who want to create a potentially exempt transfer for IHT purposes, who want to avoid reporting requirements to HMRC and who have specific beneficiaries in mind.
  • Establishing the trust as a discretionary or flexible trust would be suitable for settlors who want to create a chargeable lifetime transfer for IHT purposes and who need to retain flexibility regarding their future choice of beneficiary.

Advantages and disadvantages of a gift trust:

  • In addition to tax benefits, a gift trust is one method of establishing a financial cushion for future generations. Transferring wealth from one generation to the next via a will or other means of inheritance is a complicated endeavor, both logistically and emotionally. At the same time, these rules can bring enormous benefits to individuals, families, and communities. Understanding the nuances of gifting can bring added value to both grantors and beneficiaries.
  • One potential drawback to a gift trust is that providing beneficiaries—in particular, children—with immediate access to sizable sums may jeopardize the fund's ability to accumulate long-term wealth. Some families bypass this by setting restrictions, such as limiting the amount or frequency of withdrawals or ending future gifts to recipients who withdraw funds immediately.

 

The Pros

> Inheritance tax planning: growth on the gifted money is immediately outside of your estate. The gift is fully outside of your estate after 7 years
> Choice of trust: the trust can be written on either an absolute or discretionary basis, to suit your requirements
> Probate: trustees can access the assets immediately upon death
> Suitability: the gift trust is suitable if you do not require any access to the capital or any growth from the trust. Payments can be made to trust beneficiaries at any time (but not for your own benefit)

The Cons

> Potentially expensive
> Seek help from a professional financial planner
Should I use a gift trust if I will need access to my assets?

No.

A gift trust should not be used if you may need access to your capital.

If you require access, other solutions may offer some protection from inheritance tax (IHT).

You can find all our independent reviews of international trusts here.

When is a gift trust used?

A gift trust is commonly used by parents or grandparents who want to establish a trust fund for their children or grandchildren.

A gift trust is a viable method to avoid taxes on gifts that exceed the annual gift tax exclusion limit.

For the 2021 tax year, that amount is $15,000 or less made in a calendar year by an individual and $30,000 from a couple (the same as 2020).

Have you used a gift trust?

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Expert assessment of a gift trust

A gift trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis, as does the case for using trusts in general.

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 to you, contact us.

 

NOTE: Because trusts are so unique to each individual, it’s impossible to give them a rating for their overall performance and suitability. Therefore these reviews do not come with a star rating.

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