Family Trusts

Family Lifetime Trusts and Lifetime Gifting

Family Trusts are trusts created whilst you are alive and have numerous uses including lifetime gifting, protection of lump sum proceeds from life assurances, death in service benefits, some (but not all) pensions and can also be used to accept assets gifted via a Will.

Family Trusts – used with life policies, death in service benefits and pension death benefits

In today’s sophisticated financial market, many people have death-in-service benefits (DISB), e.g. 3x or 4x salary, through their employment or death benefits via their pension scheme. These benefits are generally nominated in favour of the surviving spouse or partner (written in trust) so are not treated as assets of the deceased’s estate. But there is a potential Inheritance Tax (IHT) problem.

Generally speaking most people would nominate their DISB to be paid directly to their spouse or partner but that is as far as much advice goes.  There is no IHT liability when they die but one may arise when the second of them dies.

For example, on the death of an employee, the DISB pays a lump sum to their nominated beneficiary.  This is outside the employee’s estate for tax purposes. However, once the benefits of the policy have been paid to the beneficiary the money then becomes an asset of their estate.  Subsequently, when the nominated beneficiary then dies their estate (which now includes the death in service lump sum payment) is subject to IHT at 40% on the value of the estate in excess of the IHT threshold.

This tax problem can be avoided by nominating the DISB into a trust. The trust is held outside the survivor’s estate; (and therefore not subject to IHT on the survivor’s death).  The survivor can be a beneficiary of the trust and receive funds so their position is not compromised in any way.  Even more beneficially the trust can be drafted with power to loan monies to the survivor.  As a result the survivor will have the full use of the funds to invest or spend, or live off the income as they see fit.  However, as a loan has been made from the trust a liability has been created which can be paid out of the survivor’s estate on their death thereby reducing the value of the estate for IHT purposes.

By using a Family Trust, not only can the survivor have the full benefit of the monies payable but an IHT saving can be made at the same time!

The use of Family Trusts is not limited to death in service benefits; they can be used in conjunction with any form of life insurance and some pensions.  Therefore anyone with any type of term life insurance or mortgage protection insurance should consider placing the benefit of the policies into such a trust.  The surviving spouse or partner can still be a trustee and therefore control how the funds are used. This way considerable IHT savings can be made.  Although pension rules have changed significantly over the last few years (where the pension itself can now be inherited rather than a lump sum) there may still be some pensions that will continue to pay out a lump sum on the death of the policy holder.  For pensions such as these the lump sum should be paid to a Family Trust for the same reasons as described above.

Family Trusts – for business or agricultural assets

The Family Trusts can be created now to receive specific assets passed into them by your Will such as business or agricultural property that qualifies for 100% Business Property Relief or Agricultural Property Relief.  Should these assets subsequently be sold then the proceeds of sale will be held in trust outside of the taxable estate.

Family Trusts – for your estate

The Family Trusts can take a portion or even the whole of the estate of the deceased via their Will.  It doesn’t, however, reduce the inheritance tax take on your death but does protect the estate for your beneficiaries from:

  • The inheritance tax take on your beneficiaries’ deaths;
  • Claims against your beneficiaries’ estates from divorce, long term care costs, bankruptcy, etc.

We can draw up a “made to measure” trust for you incorporating the appropriate powers tailored to your own personal circumstances.  Our PDF about Family Trusts contains further information and a case study.