Discretionary Trust

Beneficiaries
Advantages
-Can benefit any named person., e.g. a spouse (after death of settlor), a particular relation or category of persons, e.g. your children, your grandchildren, nephews, nieces, in-laws.
-Distribution of income and capital at trustees' discretion, and so can be done in a way that reflects circumstances at the time. Trustees, particularly a professional trustee, can be relied on to follow any informal "expression of wish" letter which you might leave.

Length of Trust
Advantage
-There is no definite time limit, as in England, but 75 years would seem to be appropriate.

Gapital Gains Tax on Assets Put in Trust
Advantage
-Capital Gains Tax can be "held-over" so that none is payable at time of transfer. The trustees acquire the assets at cost plus indexation up to 1st April 1998, cost of disposal, cost of improvements (to property) etc. Taper relief is available from acquisition onwards

Inheritance Tax
Advantages
-You can give your annual exemption of £3000 and make gifts out of normal income into a trust without Inheritance Tax implications.
-No inheritance tax on death of potential beneficiary, provided one beneficiary has not had most of the benefit, e.g. occupation of a house or part of a house, or most of the income, which might lead to the Revenue claiming it was an Interest-in-Possession trust.
-The trust can lend money to the beneficiaries, so avoiding increasing their estate

Disadvantage
-If your gifts into it within any cumulation period of 7 years exceed the nil-rate band, 20% lifetime gift Inheritance Tax is payable immediately.
-More likely to be attacked, though not retrospectively.
-Tax of up to 6% once every 10 years on any capital which exceeds the nil-rate band. (It should not)
-Tax may arise when capital is taken out of the trust, depending on circumstances, but unlikely to be a significant amount unless the trust assets grow hugely.

Income and Capital Gains Tax on the Trust
Advantage
-Any beneficiary who is a UK citizen can reclaim this tax to the extent that their own tax position allows.

Disadvantages
-The trust pays 40% income tax.
-PEPs and ISAs cannot be put into the trust, so the securities and deposits in them would have to be removed from them first, thereby losing the tax advantages. However, no chargeable gain arises at the time of transfer.
- Trust's annual CGT exemption is half the personal exemption (So half of £8,500 = £4,250 (2005-06)); above that, charged at 40% The trustees do not qualify for taper relief on held-over CGT gains for the period from 1st April 1998 until the transfer into trust.

Expenses
Disadvantages
-Bennetts' typical fees and outlays for advising on and setting up a lifetime nil-rate band trust are in the region of £875. Nil-rate band trusts in Wills are not subject to an extra charge.
-Annual running costs (accountancy, valuation and Bennetts management fees) will be about 0.5% on a trust with assets equivalent to the nil-rate band