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Maximise your Legacy using Discounted Gift Trusts

12th Feb 2024
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Many clients over 65 will have acquired excess capital, perhaps due to inheritance, downsizing, through a divorce or taking tax free cash from their pension pot. But they may still need payments from their capital in retirement to support their other income. This is the time to start thinking about how to generate that income, safeguard their legacy and minimize their Inheritance Tax (IHT) burden. Among the array of financial tools available, Discounted Gift Trusts (DGTs) can be a formidable ally in the quest for efficient wealth preservation.

Maximising your legacy using Discounted Gift Trusts | Davenport Thomas | The letters IHT (Inheritance Tax) on lettered dice on stacks of gold coins isolated on white background
Getty Images - KenDrysdale - inheritance tax

What is a DGT?

At its core, a DGT is a sophisticated financial arrangement designed to mitigate the impact of IHT while providing a reliable income stream for the donor during their lifetime. The donor (or settlor) establishes a trust, into which assets, often in the form of cash or investments, are transferred. Crucially, the value of these assets is ‘discounted’ by the estimated value of the future retained payments for IHT purposes. The amount of discount is calculated based on the level of payments and life expectancy. Importantly, a discounted gift trust can still be created even where no discount is available – because the gift will be outside of the estate if they survive for seven years and they will continue to benefit from retained regular payments.

By retaining the right to receive regular payments (perhaps 4 to 4.5% from an investment bond within the trust), the donor can maintain their standard of living while simultaneously diminishing their IHT liability.

 

Flexibility

DGTs offer flexibility in terms of trustee discretion and beneficiary designation. Whether through an absolute trust, where the beneficiaries are fixed at outset or by using a discretionary trust, which allows trustees to appoint income or capital at their discretion to any beneficiary within the class of potential beneficiaries named in the trust deed.

DGTs can be established in single or joint names (for spouses and civil partners only). The decision depends on individual circumstances and requires careful consideration as to the most appropriate route.

 

Get expert advice!

Navigating the complexities of DGTs and their interplay with Inheritance Tax regulations requires expert guidance from advisers with specialist expertise in estate planning.

At Davenport Thomas we have been helping clients with their estate planning for over 18 years. So, for a discussion about how we can help you and your clients, you can book directly into Richard’s diary here, email us or call us.

 

[email protected]

Contact number – 0208 6182077

Calendly – Richard Mumford

 

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The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. The Financial Conduct Authority (FCA) does not regulate Will writing, tax and trust advice and certain forms of estate planning.