FLEXIBLE GIFT TRUST ESTATE PLANNING WITH THE FLEXIBLE GIFT TRUST

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FLEXIBLE GIFT TRUST ESTATE PLANNING WITH THE FLEXIBLE GIFT TRUST

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OPERATOR CHECKED In Date

Estate planning with the Flexible Gift Trust

YOU SHOULD CONSIDER THE FLEXIBLE GIFT TRUST IF: • Your estate will be liable to inheritance tax on death, even if maximum use is made of exemptions, reliefs and the nil rate band.

• You would like to ensure that the gifted property is kept within the family and afforded some protection from claims by third parties.

• You are able to make an outright, irretrievable gift and have no requirement for access to the gifted amount or the income it generates. • You would like the flexibility to decide who should benefit, to what extent and when according to circumstances.

• You wish to avoid any delay in distributing the proceeds of your investment which may otherwise arise were Probate (or Confirmation) required before payment could be made. Please note that this is subject to the minimum level of trustees being maintained - see Q7 on page 7 for more details.

• You would like to retain control over when the funds are distributed and perhaps the purpose for which they are used.

• You are prepared to accept the reporting obligations and the possibility of tax charges under the settled property regime. • The tax treatment depends on your personal circumstances and may be subject to change in the future. Tax rules and your personal circumstances can change.

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Estate planning with the Flexible Gift Trust

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INTRODUCTION THE INHERITANCE TAX ISSUE PAGE 3

THE TRUST FEATURES OF THE FLEXIBLE GIFT TRUST REDUCING INHERITANCE TAX LIABILITIES WITH THE FLEXIBLE GIFT TRUST PAGE 6

SUMMARY SUMMARY OF BENEFITS SUMMARY OF RISKS PAGE 7

QUESTIONS & ANSWERS SETTING UP THE TRUST TRUST ISSUES TRUST BENEFICIARIES INHERITANCE TAX PAGE 11

IMPORTANT NOTES

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Estate planning with the Flexible Gift Trust

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INTRODUCTION THE INHERITANCE TAX ISSUE

By making your gift to a Flexible Gift Trust rather than outright to your intended beneficiaries, you can take immediate action to reduce your liabilities, yet maintain flexibility and control over who gets what and when and even the purposes for which your gift is ultimately used. And as long as the amount gifted is below your available nil rate band (see page 3), there will be no inheritance tax on creation of the trust.

Statistics from the HM Revenue & Customs show that more and more people are paying inheritance tax – even though the benefits of protecting family assets are clear. An obvious way to reduce inheritance tax liabilities without incurring any immediate inheritance tax consequences, is to reduce the value of the taxable estate during lifetime by making outright gifts that qualify as potentially exempt transfers (PETs) – either to individuals or to trusts for the absolute benefit of one or more individuals. However, it is not always appropriate or desirable for such gifts to be made. Flexibility and an element of continued control over the ultimate distribution of capital will often be an important issue.

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Estate planning with the Flexible Gift Trust

THE TRUST FEATURES OF THE FLEXIBLE GIFT TRUST

REDUCING INHERITANCE TAX LIABILITIES WITH THE FLEXIBLE GIFT TRUST

The Flexible Gift Trust is a discretionary trust that can be created by single or joint settlors. The initial trust capital will usually be provided by the issue or assignment of an investment policy or bond to the trustees of your Flexible Gift Trust.

Many people are reluctant to make substantial gifts of capital even if they are confident that future access will not be needed. This is generally due to concerns about loss of control or fears that the gifted property may end up in the wrong hands, for example, on the death, divorce or bankruptcy of the intended recipient.

The beneficiaries As settlor(s), you are irrevocably excluded from benefit under the Flexible Gift Trust and accordingly will not be able to receive any payments from the trust.

If the gift is made to a trust, many of these concerns can be overcome. But, to obtain these benefits you must be prepared to accept the inheritance tax consequences.

Under the terms of the trust, the trustees hold both the capital and income of the trust fund for any one or more of a wide class of beneficiaries as defined in the trust document. It is possible to add to or exclude beneficiaries from the beneficial class either at outset or at some later point.

Inheritance tax effect of establishing the Flexible Gift Trust When your investment policy or bond is issued or assigned to the trustees of the Flexible Gift Trust, you will be treated as having made a chargeable lifetime transfer.

In the unlikely event that undistributed capital remains in the trust fund at the end of the trust period, the undistributed balance will pass to such of your descendants as are living at that time and, if none, will be distributed among surviving members of the beneficial class. If there are no surviving members of the beneficial class, any undistributed balance will pass in accordance with the estate of the last of them to die.

The value of your gift for inheritance tax purposes will usually be the amount of the investment. However if your gift includes existing policies, then a different method of valuation will be used in respect of the existing policies. You should refer to the Technical questions and answers section of this guide for more information. No tax is payable when the gift is made as long as the value of your gift is below your available inheritance tax nil rate band (that is, the inheritance tax nil rate band threshold for the tax year of your gift less the value of any other chargeable lifetime transfers made by you in the previous seven years). Further, your gift will fall out of account altogether (and will effectively be exempt) if you survive the subsequent seven year period. If you die within seven years of making a gift to the Flexible Gift Trust, the gift(s) will use all or part of your nil rate band for the purposes of calculating tax on your death estate.

The protector You, as settlor, will automatically be a trustee and may also be the protector. Certain trustee decisions, including those relating to payments to beneficiaries, need the consent of the protector. The protector may also remove trustees and appoint their replacements. The facility to appoint yourself as protector (and a successor protector to take over the function after your death) therefore provides you with enhanced potential for control over the distribution of the proceeds of your investment.

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Estate planning with the Flexible Gift Trust

If you were to make a gift in excess of your available nil rate band, inheritance tax would be payable on the excess at the lifetime rate of 20% when the gift was made and additional tax could become payable in the event of your death within seven years. Note also that, where any inheritance tax due is paid by you (rather than by the trustees out of the gifted amount), you will be treated as having made a chargeable lifetime transfer equivalent in value to the total of the amount invested and the tax paid. This will increase the amount of inheritance tax due.

Where an inheritance tax liability arises, it must be met out of the trust fund or, if the liability has arisen by virtue of a distribution to a beneficiary, out of the distributed amount. Assuming the settlor made no other chargeable gifts in the seven year period before creation of the Flexible Gift Trust, inheritance tax charges will usually apply only where the value of the trust fund is above the inheritance tax nil rate band at the anniversary date. Please speak to your financial adviser if you need further information on these charges.

Joint settlors

Reporting requirements and the Flexible Gift Trust

Where the Flexible Gift Trust is created by joint settlors who are legally married to or in a registered civil partnership with each other, each of you will be treated as having made a chargeable lifetime transfer equivalent in value to one-half of the total amount gifted. In other circumstances, you will need to have evidence of the amounts contributed by each party and the value of the gift that each of you make will be determined accordingly.

Chargeable lifetime transfers may need to be reported to HM Revenue & Customs (HMRC) on form IHT100 even if no inheritance tax is actually payable. Whether or not a transfer is reportable will depend on the value of the gift and the reporting limits applicable in the tax year that the gift is made. Where a tenth anniversary is reached or capital is distributed to a discretionary beneficiary, the event may similarly need to be reported to HM Revenue & Customs on form IHT100 regardless of whether any inheritance tax is due.

Inheritance tax on death of a beneficiary The death of a beneficiary will not cause an inheritance tax liability in relation to the trust fund as none of the beneficiaries are treated as owning the trust capital for inheritance tax purposes.

Speak to your financial adviser for further information on completing and filing the IHT100 (and associated forms) and paying any tax that is due. Note that exempt transfers (see page 5) do not need to be reported.

At other times Property held within a Flexible Gift Trust is settled property for inheritance tax purposes. As a result, inheritance tax charges may apply: • To the trust property on the tenth anniversary of creation of the trust and periodically thereafter at ten yearly intervals, at a maximum rate of 6%; and • where property is transferred out of the trust to a beneficiary. Tax is charged on the distributed amount at a rate proportionate to that which would apply at a tenth anniversary.

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Estate planning with the Flexible Gift Trust

Additional gifts

Making regular premium investments in association with the Flexible Gift Trust

Once the Flexible Gift Trust is in place, it is possible for you to transfer other policies to the trust or to gift further sums to the trustees for them to invest or to ‘top-up’ the investment. Additional investments into your trust plan will be treated as further gifts to the trust.

Where regular investments are made under a Flexible Gift Trust, the premiums paid will be chargeable lifetime transfers to the extent that no exemption applies. Often, premium payments will be made out of surplus income and so will qualify for an exemption (see opposite). Note, however, that even where premium payments are exempt from inheritance tax, inheritance tax charges may arise at the tenth anniversary of the trust or subsequently depending on the value of the trust property at that time. You should speak to your financial adviser for further details of these charges.

These gifts will usually be chargeable lifetime transfers but will be exempt from inheritance tax, and so outside your estate with immediate effect, if made under one of the following headings: • Annual exemption – Gifts of up to £3,000 can be made each year without any liability to inheritance tax. • Normal expenditure out of income exemption – Gifts made regularly out of surplus income will be exempt from inheritance tax. The commitment to make additional investments periodically (eg regular premium payments) will usually satisfy the requirement for regularity. As long as the conditions are satisfied, the exemption will be available regardless of the monetary value of the premium. Additional gifts, even if exempt, will impact on the calculation of later inheritance tax charges that may arise on anniversary dates and where capital is distributed to beneficiaries, and may increase the amount of tax payable on these events.

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Estate planning with the Flexible Gift Trust

SUMMARY SUMMARY OF BENEFITS

SUMMARY OF RISKS

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• A flexible arrangement that provides you with an element of control over the ultimate distribution of your capital.

• No access to the trust fund for the settlor(s).

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• Any investment growth outside your taxable estate from day one.

• Immediate charge to inheritance tax at the lifetime rate of 20% (and possibility of additional tax on death within seven years) if the amount gifted exceeds your available nil rate band.

• As long as the amount gifted (that is, the amount of the chargeable lifetime transfer) is below your available nil rate band:

• Inheritance tax charges may arise on ten yearly anniversaries and/or where capital distributions are made from the trust.

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• The inheritance tax nil rate band may not continue to increase or keep pace with investment performance which may lead to inheritance tax periodic and exit charges in the future even though there was no inheritance tax charge on the making of the gift.

• Tax-efficient investment vehicle for the trustees. • Easy to complete documentation.

• The trustees may incur costs if they need to instruct a professional adviser in respect of their reporting duties to HMRC.

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Estate planning with the Flexible Gift Trust

QUESTIONS & ANSWERS SETTING UP THE TRUST 1. How is the Flexible Gift Trust established?

5. Is investment restricted to particular products?

Where you are making a new investment, you should complete the Flexible Gift Trust at the same time as you complete the investment application. The investment will be issued to the trustees to hold on discretionary trusts for your chosen beneficiaries. The trust is established as soon as the bond or other investment comes into force.

No. The trustees’ powers are very wide and consequently allow the trustees to realise the initial trust investments and reinvest in any Scottish Widows or other product at anytime. However, there may be tax implications, additional trust administration and costs where incomeproducing investments or assets chargeable to capital gains tax are added to or held within the trust.

If your policy is already in existence, completion of the Flexible Gift Trust document will transfer ownership of your policy to the trustees.

TRUST ISSUES 6. On the settlor’s death is probate

(or confirmation) needed?

2. Who can be the settlor?

Probate/confirmation will not be needed on the settlor’s death (as long as there is at least one surviving trustee) as no change of ownership occurs. The legal owner will be the surviving trustees or trustee and the assets will remain subject to the trust terms upon the death of the settlor.

The settlor is the person who establishes the trust. The settlor must be over 18 years of age and of full mental capacity. Scottish Widows will not normally accept a trust created under a power of attorney. For tax purposes, a person will be regarded as the settlor where he or she provides assets to the trust either directly or indirectly. The Flexible Gift Trust can be established by joint settlors if the application for the investment (or the existing policy) is in joint names.

7. Who should be appointed as trustee?

As settlor, you will automatically be one of the original trustees. It is, of course, your decision who should be the other trustees to act with you. The other trustees will generally be members of your family.

3. Can a joint cheque be used to establish

the Flexible Gift Trust?

Trustees must be adults of sound mind and, if individuals, should ideally be living in the United Kingdom. They should be responsible people who are aware of and sympathetic to the circumstances of the beneficiaries. You must appoint at least one other person to act with you. Your co-trustees may be beneficiaries under the trust but if beneficiaries are to be trustees care should be taken to select individuals who will act impartially and who will not try to defeat the interests of other beneficiaries in their own favour.

For the reason given above, it is important that any assets being gifted to a trust are those of the settlor only. As long as the Flexible Gift Trust is established by joint settlors who contribute in equal shares, a cheque for the initial investment drawn on a joint account is perfectly acceptable. 4. Can my existing life insurance investment

bonds be transferred to the Flexible Gift Trust? Yes. The existing investments can be included in Part B of Box E of the trust form and will be assigned to the trust automatically once you and the additional trustees sign the trust document. Alternatively you can transfer the existing investments by completing a separate deed of assignment (available on request) after the trust has been established. Speak to your financial adviser for advice about the value of the initial or further gift and to arrange the assignments.

In some circumstances it may be appropriate to appoint a professional person (such as a solicitor, accountant or professional trust company) as a trustee, although such a trustee may charge for his or her services (and there will be no trust income from which fees can be met). It is a requirement of the Flexible Gift Trust that there be at least two individual trustees or a corporate trustee.

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Estate planning with the Flexible Gift Trust

TRUST BENEFICIARIES

8. Can trustees be removed and new

trustees appointed?

12. On what terms do the trustees hold

Yes. The protector (see below) has the power to appoint and remove trustees.

the trust fund? The trustees hold the trust fund on discretionary trusts for a wide range of beneficiaries who are able to benefit from trust capital or income at the discretion of the trustees.

9. Who is the protector?

This is the person who oversees the activities of the trustees. You will usually want to be protector during your lifetime.

The beneficial class is drawn extremely widely to include your spouse or civil partner (except in the case of joint applications), your children and grandchildren, their spouses, widows, widowers and civil partners and anyone (other than you) descended from your father or mother. Care should be taken where payments are to be made to the settlor’s spouse during the settlor’s lifetime.

10. What are the other functions of the protector?

The protector’s role is to ensure that the trustees are aware of the requirements of the beneficiaries. This is achieved by requiring the protector’s agreement to the exercise of certain of the trustees’ discretionary powers. These include:

At the end of the trust period (see Q19), any part of the trust fund that remains undistributed will pass to such of your descendants as are living at that time and, if none, will be distributed among surviving members of the beneficial class. If there are no surviving members of the beneficial class, any undistributed balance will pass in accordance with the estate of the last of them to die.

• power to appoint capital in favour of beneficiaries • power to add or remove beneficiaries. The protector’s consent is not, however, needed for appointments of income that may arise to the trust fund (in the unlikely event that the trustees choose to invest in income-producing assets). Such income may be accumulated or paid out to one or more beneficiaries purely at the discretion of the trustees.

13. Can I access the trust fund during my lifetime?

No. Under the terms of the Flexible Gift Trust, you are irrevocably excluded from benefit.

11. What happens if the protector or one of

the trustees dies or no longer wishes to be protector or trustee?

14. Can the trustees make payments or loans

to the beneficiaries before the end of the trust period?

The current protector may appoint a successor to take over that function either immediately or on his or her death. If, however, the current protector dies or becomes incapacitated without appointing a successor, then the requirement for the protector’s consent to the exercise of trustee powers is suspended pending the appointment of a new protector by the trustees (should they choose to do so).

Yes. The trustees may appoint the whole or any part of the trust fund to any one or more beneficiaries with the consent of the protector (if any) at any time. Capital payments made to beneficiaries must be made by deed of appointment and may have inheritance tax or other consequences. Alternatively, the trustees can make loans to the beneficiaries but professional advice is recommended before proceeding.

Any trustee who no longer wishes to act may retire as long as a replacement is appointed simultaneously or, if no replacement can be found, there are at least two trustees or a corporate trustee remaining after the retirement. Appointment of a replacement trustee is usually the responsibility of the protector. However, if there is no protector then the replacement trustee may be appointed by the settlor, or failing that, the continuing trustees.

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Estate planning with the Flexible Gift Trust

INHERITANCE TAX

15. Could capital advances, made in accordance

with the trustees’ power of appointment, be treated as income for income tax purposes?

20. What is the inheritance tax effect of setting

up the Flexible Gift Trust?

No. Capital advances to discretionary beneficiaries or beneficiaries with contingent interests are not treated as income for income tax purposes (Stevenson v Wishart [1987]). The Revenue Trusts and Estates Tax Return Guide confirms that: “Payments out of trust capital or accumulated income are not to be regarded as the income of the beneficiary, irrespective of the purpose for which they were made”.

Gifts made to the Flexible Gift Trust will usually be chargeable lifetime transfers for inheritance tax purposes unless one of the exemptions from inheritance tax (outlined on page 5 of this brochure) applies. If no exemptions apply and the amount gifted is greater than your available nil rate band, inheritance tax will be payable at the lifetime rate of 20% on the excess. Otherwise no inheritance tax will be payable on the gifted amount unless you die within seven years of establishing the trust.

16. Can my widow or surviving civil partner

benefit from the trust fund after my death? Yes. The trustees can make appointments of capital to your widow/er or surviving civil partner as a discretionary beneficiary as long as he/she is not also a settlor.

21. What happens in the event of my death

within seven years of making a chargeable lifetime transfer? If you die within seven years of making a chargeable lifetime transfer, the gift will use all or part of your nil rate band for the purposes of calculating tax on your death estate.

17. Can further beneficiaries be added to the trust?

Yes. Further beneficiaries (other than yourself) can be added after the trust has been established. This needs the written agreement of the protector and the signature of all of the trustees on a further deed naming the additional beneficiary.

If inheritance tax was payable at the lifetime rate when the gift was made, additional tax may become payable on death.

18. Can beneficiaries be removed from the trust?

22. What is the value of my gift for inheritance

Removal of beneficiaries is generally not needed, as the trustees can simply decide not to exercise their power of appointment in favour of any person who is not to benefit. There may, however, be circumstances where it is desirable to remove a beneficiary and the terms of the trust allow for this to be achieved. The exclusion must be made by the trustees by deed and requires the consent of the protector.

tax purposes? Where you have completed a trust declaration at the same time as making an application for an investment policy or bond, the value of your gift will usually be equivalent to the amount invested. Where you have transferred existing policies to the trustees of the Flexible Gift Trust either at the time of establishing the trust or after the policy has been issued, the method of valuation is different.

19. How long can the trust last?

The trust can continue after your death and can last for a maximum of 125 years from the date of creation, or until such earlier time as the trustees decide.

The value of your gift will be the greater of the market value of the policy at the date of the assignment and the total of the premiums paid less any withdrawals (although relief is given if the market value of a unitlinked policy is less than when first allocated). Where the policy is a regular premium policy, each premium paid following the initial establishment of the trust will also be treated as a gift for inheritance tax purposes. If in any doubt, you should speak with your financial adviser for clarification.

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Estate planning with the Flexible Gift Trust

23. How might the Flexible Gift Trust impact

26. Is it possible for me and my spouse/civil

on other planning and vice versa?

partner to each create a Flexible Gift Trust and benefit from the arrangement?

Gifts made to the trust that fall within one of the exemptions outlined on page 5 will not impact on inheritance tax planning.

Criss-cross arrangements are not advisable as this may amount to a ‘gift with reservation’ and jeopardise the planning. However, married couples or civil partners may establish joint arrangements.

In other circumstances, you will be making a chargeable lifetime transfer for inheritance tax purposes. Even if the amount gifted is less than the nil rate band, there may be inheritance tax to pay on creation of the trust if you have made other chargeable transfers in the preceding seven year period. Note that potentially exempt transfers made in the seven year period leading up to establishment of the Flexible Gift Trust will not use up any part of your nil rate band for these purposes.

27. My partner and I intend to set the plan up

as joint settlors. How will this impact on the inheritance tax position? Where husband and wife or civil partners create the Flexible Gift Trust as joint settlors (and transfers made to the trust are not exempt from inheritance tax by virtue of one of the exemptions outlined earlier), each will usually be treated as having made a chargeable lifetime transfer equivalent to one-half of the total amount gifted.

In the event of your death within seven years, the gift to the trust will use up some or all of the inheritance tax nil rate band. Chargeable lifetime transfers may also impact on the tax payable on later potentially exempt transfers (PETs) where death occurs within seven years of the PET and on the calculation of periodic and exit charges incurred under later established discretionary trusts.

28. Is it possible for me to create more than one

Flexible Gift Trust? Yes. But you should bear in mind that where two or more settlements are created on the same day by the same settlor, these will be ‘related settlements’ for inheritance tax purposes. In calculating the rate of tax which will be charged on a periodic or exit charge, the initial value of the property held in the related settlement will be taken into account to counteract tax avoidance.

24. Could a liability to inheritance tax arise

on the death of a beneficiary? No. None of the beneficiaries are treated as owning the trust capital for inheritance tax purposes. This means that the death of a beneficiary will not cause an inheritance tax liability in relation to the trust fund.

In other situations, the earlier chargeable lifetime transfer will affect the settlor’s cumulative total for the purposes of calculating the tax payable on both the later transfer and on the inheritance tax periodic and exit charges that may arise to the second or subsequent trust.

25. Will inheritance tax become payable

in any other circumstances? A charge to inheritance tax may arise on the trust’s tenth anniversary (and on subsequent ten yearly anniversaries) if the value of the trust fund (when aggregated with the value of any capital distributions made in the preceding ten year period) exceeds the nil rate band applicable at that time. A proportionate charge to inheritance tax may also arise where trust capital is distributed to a trust beneficiary.

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Estate planning with the Flexible Gift Trust

IMPORTANT NOTES

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Important. Please read carefully If there is anything you do not understand or if you would like more information about any aspect, please contact us. This brochure gives an overview of the Flexible Gift Trust and its inheritance tax and other effects. Scottish Widows recommends that before proceeding you should consult your legal and financial advisers. Special consideration may be needed where you are either resident or domiciled outside the UK. Many countries have imposed reporting requirements on trustees where a settlor, trustee or beneficiary is resident overseas or any of the assets or rights placed in the trust are located overseas. If you are a trustee or are thinking of becoming a trustee and believe this might apply to you we’d recommend that you take immediate legal advice. The information given in this brochure is based on our understanding of UK law and HM Revenue & Customs practice at the time of printing. We accept no liability for the accuracy of the information provided. Legislation regarding taxation and Revenue practice may be subject to change, which cannot be foreseen. References to civil partners are references to individuals who have registered their ‘civil partnership’ under the Civil Partnership Act 2004.

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Scottish Widows Limited. Registered in England and Wales No. 3196171. Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Telephone: 0131 655 6000. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 181655. 51083 12/15