Many people have death-in-service benefits through their employment or death benefits via their pension scheme. Most people nominate their death benefit to be paid to their spouse or partner but these benefits are generally not considered an asset of the estate of the deceased as the trustees of the scheme have discretion over payment. They are therefore usually free from inheritance tax (IHT).
The value of these death benefits may create an IHT liability when the surviving spouse dies. For example if on the first death a lump sum is paid to the survivor this becomes an asset of their estate. A charge of 40% will arise in respect of all assets which are in their estate at the time of death over and above the nil rate band (currently £325,000).
Nominating the death benefits into a Spousal Bypass Trust can avoid this problem. Discretionary in form these trusts provide flexibility as the beneficiaries of income and capital can include the surviving spouse/civil partner and children. Even more beneficially the trust can be drafted with power to loan monies to the surviving spouse. As a result the surviving spouse can have the full use of the funds but with the loan creating a liability on their estate, reducing its value for IHT purposes.
The trust will be subject to its own IHT regime, currently a charge every 10 years of 6% and an exit charge but this is still likely to offer a considerable tax saving.
Spousal by-pass trusts are not limited to death in service benefits and pension benefits. They can be used in conjunction with any form of life insurance. Anyone with any type of term life insurance or mortgage protection insurance should consider placing the benefit of the policies into such a trust, though care must be taken to ensure that critical illness, cash value or other lifetime benefits are not included.
Many pension and life insurance companies offer standard precedent trust documents. Completing these standard forms incorrectly can lead to very expensive consequences. They may not include all necessary powers and their use can be limited. Clients with substantial estates may wish to consider multiple spousal by-pass trusts to increase the availability of the nil rate band across the trusts. We can draft ‘made to measure’ trusts incorporating all the appropriate powers tailored to each client’s personal circumstances. They can be set up quickly with a nominal sum of £10 and can be done at the same time as drafting a client’s Will.
For more information on this article contact Nicholas Turner
