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 income promise.

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.

Advantages

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.

Disadvantages

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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