A Discounted Gift Trust
This is slightly more complicated than a Loan
Trust. In simple terms however, the
Settlor makes a gift to a Trust, but at the same time makes the Trustees promise
to pay them an income (normally, but not always) for the remainder of their
life (sometimes it can be for a fixed term).
An income promise like this is often referred to as an “Annuity”.
If a payment of £100,000 is made to the trust, with
an attaching annuity income of £4,000 p.a. only a proportion of the £100,000
will be considered as a Gift, with the balance being considered as securing the
annuity income. The balance between this
two-way split will depend upon a number of factors:
The age of the Settlor
The health of the Settlor
The amount of the income promise or annuity
The first two factors are important as they are used
to ascertain the Settlor’s life expectancy and hence the cost of providing the
The trustees have all the capital to use, but they
need to be mindful that they have a duty to invest it in such a way that the
income can be paid out to the Settlor.
The Settlor knows that whilst they have given away
their capital, they have a secure income stream. In addition to this, if anything unfortunate
happens and the Settlor dies unexpectedly they still benefit from the immediate
discount on the gift to the trust, but the trustees have not had to pay the
income promise for as long as was expected.
The Settlor does not have
access to any of the underlying capital in the trust. Only the agreed income
stream and on the agreed payment dates.
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