A discretionary trust has been set up with funds from various sources for the benefit of a minor (school fees etc)
The original capital of the trust included monies the minor had inherited from a distant relative some years earlier.
As this sum didnt originate from the parent, is this element of the trust treated as a settlement by the parent? And if so which one, and why?
I cant see any reference to this scenario in my material which details direct gifts from the parent (settlement) and gifts by the way of a Will of wider releative into the childrens trust (not a settlement) but not use of the children's own money.
Previous accountant has treated this portion of the trust as a taxable income of (just one of) the parents. I did politely ask why they had done this and got a rather how should I put it, unhelpful, response.
Hopefully I am not being dim here but surely it cant be a settlement on the parents if it wasnt their money in the first place? There is a small portion that WAS provided by one parent which will be a settlement, but this bit seems wrong.
Replies (6)
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assumptions...........
If the original capital of the trust fund was put into trust by will of the deceased, then it is the deceased who is the settlor. If the parents have added to the settlement, then they are settlors of that portion of the trust fund, not the whole of the trust fund.
If the original money came from the deceased direct to the child without forming a trust, then the original capital will be held on a bare trust for the minor.
Have you read the trust deed/will?
further assumptions
You can only have a discretionary trust if there has been a trust formed which would of course require a trust deed. This would detail the settlor.
The source of the funds determine the tax treatment.
If there was a discretionary trust formed then that part of the trust fund would be trust assets and taxed accoridingly.
Any funds subsequently added would be taxed according to their source.
If for example, the money in the will was left to the minor then that part of the settlement cannot be part of the discretionary trust. It would be a bare trust. As such it would be taxed as the income of the beneficiary.
The funds which were added by the parent would be taxed as income of the parent to the extent they exceed £100pa.
If as you say, this is a discretionary trust, then there will have to be a trust deed. However, what I think you mean is that the parents have taken it upon themselves to lump all of the funds from various sources together, put them in a bank account for the minor and say "this is Johnny's trust"
In which case the tax treatment would be
funds originally belonging to minor - taxable as income of minor
funds added by parents - taxable on parents to the extent they exceed £100pa
Am I right to make these assumtions? Or am I barking up the wrong tree?
If I am making incorrect assumptions, it would help if you could provide the source of all of the fund.
I hope this is of some help.