Financial planning for death - Income from a trust and tax
Discussion
Looking for some advice on behalf of my closest friend who has terminal bowel cancer as he starts to get his affairs in order.
Some info for background, he is with a long term partner, they have a 1 year old child, not married. Mid 40's. Their primary residence is my friends house, in his name only, owned with a small mortgage, approx value £250k. They recently purchased another property, in her sole name, with a small mortgage. This is in a different part of the UK, closer to her home town, family and support network etc. She will move there with the little one, once the inevitable happens. Other assets are some crypto, mainly bitcoin.
He has been seeking advice on various matters from legal professionals but frequently gets contradictory advice and the firm he wants to use for his will, will not give any advice regarding financial matters. So for example, he want's to put his property into trust, but any questions around the income and tax liabilities, the firm doing the will cannot help with.
Assume the mortgage is paid off on his residence. He would like to put the house and bitcoins into trust for when his daughter is 18, or sooner for specific purposes such as education, to be at the trustees discretion. He would like his partner to receive the rental income from the property until then if it is practical and financially sensible to do so.
I understand that with a trust, there is a 10 yearly valuation and a 6% or thereabouts tax liability is due. This can be settled using funds from the trust assets, partial sale of a bitcoin for example. True / false / any gotchas?
The specific question is - how is the rental income taxed? Some say it will be his partner, she receives the rent and will pay the tax on the rental income at her marginal rate. Other articles I have read say that the trust should pay the income tax at 45%, with what is left going to the beneficiary.
Any advice appreciated.
Thanks in advance.
Some info for background, he is with a long term partner, they have a 1 year old child, not married. Mid 40's. Their primary residence is my friends house, in his name only, owned with a small mortgage, approx value £250k. They recently purchased another property, in her sole name, with a small mortgage. This is in a different part of the UK, closer to her home town, family and support network etc. She will move there with the little one, once the inevitable happens. Other assets are some crypto, mainly bitcoin.
He has been seeking advice on various matters from legal professionals but frequently gets contradictory advice and the firm he wants to use for his will, will not give any advice regarding financial matters. So for example, he want's to put his property into trust, but any questions around the income and tax liabilities, the firm doing the will cannot help with.
Assume the mortgage is paid off on his residence. He would like to put the house and bitcoins into trust for when his daughter is 18, or sooner for specific purposes such as education, to be at the trustees discretion. He would like his partner to receive the rental income from the property until then if it is practical and financially sensible to do so.
I understand that with a trust, there is a 10 yearly valuation and a 6% or thereabouts tax liability is due. This can be settled using funds from the trust assets, partial sale of a bitcoin for example. True / false / any gotchas?
The specific question is - how is the rental income taxed? Some say it will be his partner, she receives the rent and will pay the tax on the rental income at her marginal rate. Other articles I have read say that the trust should pay the income tax at 45%, with what is left going to the beneficiary.
Any advice appreciated.
Thanks in advance.
As above - marry her and, as he trusted her enough to have a child with her, trust her to look after the said child.
Does he want the mother to struggle through life supporting the child knowing that there is money for the daughter in the future that she can't access because he didn't trust her to do the right thing.
Rental properties seem to be an area lots are getting out of and why pay for the setting up and management of the trust.
Does he want the mother to struggle through life supporting the child knowing that there is money for the daughter in the future that she can't access because he didn't trust her to do the right thing.
Rental properties seem to be an area lots are getting out of and why pay for the setting up and management of the trust.
The 10-year charge relates to inheritance tax, but would apply only if the property within the trust exceeds the IHT threshold. Even the HMRC web site says "The calculation for the 10 yearly charge is complicated."
Indeed, trusts can be complicated. However, I guess that your friend wants to avoid the scenario where he leaves everything to his current partner, she subsequently marries somebody else, she later pre-deceases her husband, and then the husband excludes your friend's child from his will?
You should be able to find a lawyer who's willing to give advice via the STEP web site: https://www.step.org/about-step
Regarding the rental income, I believe that this would be the trust's income because it's income that has been generated from the trust's asset.
Indeed, trusts can be complicated. However, I guess that your friend wants to avoid the scenario where he leaves everything to his current partner, she subsequently marries somebody else, she later pre-deceases her husband, and then the husband excludes your friend's child from his will?
You should be able to find a lawyer who's willing to give advice via the STEP web site: https://www.step.org/about-step
Regarding the rental income, I believe that this would be the trust's income because it's income that has been generated from the trust's asset.
Thanks for the replies so far, I will pass on the thoughts and sentiments or point him to the thread and I will have a look at the link above which is most useful, thanks again.
It's not a case of not trusting her to raise the child or be sensible with the money and he certainly wouldn't want to see her short on funds if there is money tied up in the trust, there would be provision for the trustees to use discretion. The little one ultimately getting nothing after a re-marriage is a concern he has no doubt thought of but I think above all else it is to give him some comfort that whatever happens he has done what he could to make sure that there will be something for when she is older and needs funds for uni or for a house deposit etc.
I agree with what has been said that trusts do seem to be a hassle best avoided though and likewise, being an accidental landlord could also become burdensome when his partner will not be local to the property and repairs and maintenance will be in the hands of an agent.
Might sound like a daft question, but what is the advantage of being married - I couldn't find one when searching?
It's not a case of not trusting her to raise the child or be sensible with the money and he certainly wouldn't want to see her short on funds if there is money tied up in the trust, there would be provision for the trustees to use discretion. The little one ultimately getting nothing after a re-marriage is a concern he has no doubt thought of but I think above all else it is to give him some comfort that whatever happens he has done what he could to make sure that there will be something for when she is older and needs funds for uni or for a house deposit etc.
I agree with what has been said that trusts do seem to be a hassle best avoided though and likewise, being an accidental landlord could also become burdensome when his partner will not be local to the property and repairs and maintenance will be in the hands of an agent.
Might sound like a daft question, but what is the advantage of being married - I couldn't find one when searching?
PurpleFox said:
Might sound like a daft question, but what is the advantage of being married - I couldn't find one when searching?
Property can be passed on outside of IHT between spouses.Trusts & rentals sounds to be a real potential nightmare - there's a reason many landlords are selling up.
PurpleFox said:
Might sound like a daft question, but what is the advantage of being married - I couldn't find one when searching?
There are also the rules of intestacy to consider. If your friend were to die unmarried without a will, then his partner would get nothing (all of his estate would go to his child). If he were to die married without a will, then the split of the estate between wife and child would depend on its value and which country your friend lived in.
PurpleFox said:
He would like to put the house and bitcoins into trust for when his daughter is 18, or sooner for specific purposes such as education, to be at the trustees discretion.
Who would be the trustees? It's often these practical matters that trip people up rather than the technical stuff.On the technical front there can be significant costs around set-up, proper annual accounts, trust tax return etc.
I'd have thought crypto was a poor asset to hold in trust because it produces no income. A large part of the point of a trust would be to use the daughter's annual tax free Income Tax allowance. Trust pays 45% tax but she can make a matching tax reclaim from HMRC. Again, it all needs to be done properly.
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