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Discounted gift trust

Discounted gift trust – discretionary – English law
Discounted gift trust – bare – English law

The discounted gift trust is a trust arrangement that allows the settlor to retain access to some of their capital in the form of an income stream that is set out as part of the trust. The rights to withdrawals continue for their lifetime or until the fund has been exhausted.

The gift into trust is discounted by the value of their income stream which is actuarially calculated based on information such as their age, state of health and the level of withdrawals they require.

This type of trust may be used by those who wish to guard against IHT but don’t want to lose access to all of their capital. It is not suitable if no income is required. The bare version allows for beneficiaries to be named at outset (with a specified share) and remain fixed throughout the trust period. The discretionary version doesn’t require named beneficiaries and provides flexibility over who can benefit. Example: Joan is 65. She has a capital sum of £150,000, which she has no need for, but as she has just retired she would like to supplement her pension with some other income. She invests the full £150,000 in a discretionary gift trust with withdrawals of 5% a year of the original investment, payable to her on a monthly basis.

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