Family Trusts

Family Lifetime Trusts and Lifetime Gifting

Family Trusts are lifetime trusts created whilst you are alive and have numerous uses including lifetime gifting, protection of lump sum proceeds from life assurances, pensions and death in service benefits and can also be used to accept assets gifted via a Will.

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

In today’s sophisticated financial market, many people have death-in-service benefits (DISB) 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 couples nominate their DISB to be paid directly to their spouse or partner but that is as far as much advice goes.  As a result, because the benefit is not treated as an asset of the estate, on the first death (when the first of them, who holds the DISB, dies) there is no liability to IHT.

However, IHT liability arises when the second of them dies.  For example, on the death of the first partner, the DISB pays a lump sum to the survivor.  This is outside the estate for tax purposes.  Once the benefits of the policy have been paid to the survivor they become an asset of their estate.  Subsequently, when the survivor dies their estate (which would include any death-in-service benefit monies) 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 or pension death benefit into a trust.  The trust is held outside the survivor’s estate; (and therefore not subject to IHT on the survivor’s death).  However, the survivor can be a beneficiary of the trust and receive funds.  Even more beneficially the trust can be drafted with the 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!  Family Trusts are not limited to death in service benefits and pension benefits.  They can be used in conjunction with any form of life insurance.  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.

Note that pension legislation has changed recently so that most pensions can now be inherited from your deceased spouse/partner as a continuing pension rather than as a lump sum.  It may not, therefore, be appropriate to change the beneficiary to trust as described above.  It is recommended that you seek further advice and guidance from your Financial Adviser, employer or pension provider.

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 the 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.  Take a look at our Family Trust PDF for further information and an example detailing the tax savings.

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