As we review Prudential discounted gift trust, we’ll cover the following points:
- Discounted gift trust explained
- Prudential discounted gift trust key features
- Prudential discounted gift trust pros and cons
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Discounted Gift Trust Explained
In the United Kingdom, this is a specific kind of trust arrangement intended mainly for inheritance tax planning.
UK financial services firm Prudential offers this product to help manage IHT duties while ensuring a consistent flow of income in retirement.
What happens to a discounted gift trust on death?
Because of its initial discounting system, a DGT enables an effective transfer of assets to successors with less exposure to IHT upon the death of the settlor.
If specific timing and structural requirements are fulfilled, the entire trust fund’s value normally transfers to beneficiaries without resulting in more IHT charges.
Prudential Discounted Gift Trust Key Features
Depending on how much is invested and the settlor’s life expectancy, the trust enables clients to make a lump sum investment and receive fixed, ongoing income for the rest of their lives.
Usually obtained via an investment bond issued by Prudential and Prudential International, this income enables clients to select investments that best meet what they need.
The anticipated future payments to the settlor are deducted from the gift’s value when it is placed into the trust. By lowering the gift’s worth for IHT calculations, this discount may enable a larger portion of the inheritance to pass tax-free to beneficiaries.
The payments are fixed and cannot be changed once they are made though, which limits flexibility.
Throughout their lives, clients can give beneficiaries small sums of money. After the customer passes away, they may also permit beneficiaries to receive the leftover funds.
The trust can support arrangements with a single or joint settlor.
Discounted Gift Trust Prudential Structure Options
Depending on the client’s wishes and situation, the product may be structured as either:
- Discretionary Trust: Trustees are free to choose how much money is distributed to different beneficiaries. Clients who are unclear about who should profit from the trust assets can choose this option.
- Absolute Trust: Beneficiaries and their portion of the trust fund must be chosen by clients upon setup. Because these variables are set and cannot be altered at a later time, it is appropriate for clients who are certain of their distribution choices.
Who can apply to Pru discounted gift trust?
People who wish to lower their IHT obligation while still earning income during their lifetime can typically do so through the Prudential Discounted Gift Trust.
It’s ideal for clients who are in reasonable health and are expected to live for seven years following the establishment of the trust.
Prudential Discounted Gift Trust Tax
Trustees are not immediately liable for taxes on withdrawals of up to 5% of the initial investment every year.
Income tax responsibilities may result from chargeable event gains, depending if the trust is discretionary or absolute.
Discounted Gift Trust Prudential fees
Typical trust expenses could include establishment, management, and possible exit fees. Such depend on the way the trust’s assets are accessed or handled.
Prudential discounted gift trust pros and cons
Benefits of a discounted gift trust
- For the purposes of IHT, the original donation made to the trust may be deducted.
- Clients can continue to receive lifelong, fixed, regular payouts, which will give them a reliable source of income and allow them to continue transferring money to beneficiaries.
- Any increase on the investments made within the trust is outside the settlor’s estate from day one, so IHT is further trimmed.
- Beneficiaries may receive modest capital payments from the trust.
- Customers can select the structure that best suits them.
- Couples wishing to administer their estate jointly may find it advantageous that it supports single or joint settlor options.
Disadvantages of a discounted gift trust
- The recurring payment amounts are set and cannot be altered.
- Only fixed payments are made to the settlor; they are not able to access the funds placed in the trust.
- People with bad health and those who are unlikely to be liable for IHT should not use it.
- Withdrawals from investment bonds held in the trust may still have income tax charges even when there are tax benefits, especially if chargeable events take place.
- The health and life expectancy of the settlor may have an impact on the trust’s discount and overall efficacy.
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