#13766 - Worked Answer Discretionary Trust - Private Client

The sort of Questions you are likely to get in the exam…

Do T’s have authority to give X xx,xxx?

Look to the trust instrument and respective clauses.. what are the Trustees powers? Do they have authority to pay capital? State clause number and confirm Y/N.

Appointment of capital

• An appointment of capital from a discretionary will trust within 2 years of death will normally be read back into the will under IHTA 1984,s144.

• Usually reading back would mean that the spouse exemption would apply to the xx,xxx appointed and so the tax paid on the xx,xxx would be refunded.

- NOTE: Appointments can be made within 3 months and from 2 years of death so the appointment should not be made immediately or there will be no

reading back. This is because reading back occurs only where the transfer

would otherwise be chargeable to IHT. An appointment in the first 3 months is

not chargeable. Advice is often ‘to act swiftly’

Sometimes you can get around this if time is pressing. Depending on the will the Trustees may be able to lend money from the trust under the Power to Lend provision (refer to clause/ schedule) and then releasing the debt so as to turn it

into an appointment of capital when safe to do so.

(c) [NAME] has also heard from Andrew’s widow who has been approached by an American woman who claims she and Andrew had a relationship shortly before his death and she has had a child, Nick, as a result. Andrew’s widow and Phillip have reasons to believe the story and wonder if the child could be maintained as a beneficiary of the trust. Advise [NAME] (12 mrks)

(c) Although Nick is a grandchild of Julia (and within the class of beneficiaries in

5.3.2 as “remoter issue”) he is illegitimate and is disqualified as a beneficiary

under clause 5.4. The trustees could add him as a beneficiary as they have

power to do this under clause 6.

Query Julia’s wishes on this issue. Why did she have clause 5.4 included? Is it

appropriate to go against her wishes?

]

If the intention is to distribute the whole of the trust fund to [NAME] in MONTH [upon attaining 25] ,can they safely distribute all the available income to NAME?

No, the T’s cannot safely distribute all of the income to [NAME].

They ought to retain the [TAX STILL LEFT TO PAY ] within the trust to meet the liability calculated.

There is a further complication in that when [NAME] receives the income it will be treated as if it is NET of tax at 45% paid already.

To the extent that this is not so, i.e. on the dividend income and the first 1000 of trust come, the T’s will be required to fund the tax shortfall. This means that the T’s should retain additional funds to cover this and [NAME] will receive less income.

Trust...