When an adviser refers to controlled lifetime gifts, they mean ones which places restriction on the recipient of that gift. In the context of estate and inheritance tax planning, a controlled lifetime gift could include:
- A gift into a trust or foundation
- A gift of shares subject to the articles/shareholders agreement
- A gift of a partnership interest subject to a partnership agreement
The restrictions on the recipient of the gift are provided for within the legal framework of that gift. With a trust, the trust deed will stipulate what a beneficiary is entitled to and when. Some trust deeds can be written to provide the trustees with the power to decide when a beneficiary can benefit and others will lock out beneficiaries on certain events, such as bankruptcy or divorce to protect the assets from claims. A foundation may offer greater asset protection when no fiduciary relationship exists between the council and beneficiaries. The entitlement to shareholders may be restricted by the type of shares they are given, for example capital growth shares or preference shares rather than ordinary voting shares. Shares may also be restricted with preemption rights, which can also be drafted to protect in the case of certain events (divorce, bankruptcy etc.). A partnership can also be used to control the interests of the recipient.
For inheritance tax purposes, controlled lifetime gifts are more difficult due to legislation to prevent gifts with reservation of benefit, pre-owned assets and chargeable lifetime transfers. Whilst all that legislation exists, it does not prevent a controlled lifetime gift being made. Gifts will need to be carefully planned and the donor may need to make good use of exemptions and reliefs to prevent or mitigate inheritance tax.