A question of trust

A question of trust

Like many others, I breathed a sigh of relief after the government’s re-think on probate fees in England and Wales in April. Many executors would have struggled to pay the higher probate fees, particularly in cases where estates are asset rich but cash poor, and even quite simple estates with only a family home as the main asset could have seen a sharp rise. Executors needing to borrow funds until grant of probate gives them access to the estate could also have been faced with further administrative headaches.

That said, I think we’ll see some sort of probate fee reform resurface after the election, as well as increased scrutiny of gifts being made to ensure that they’re not a deprivation of assets exercise ahead of any future social care means-testing assessment. So it’s still well worth considering ways to mitigate the potential issues these could bring.

A possible solution is to write a life policy in trust, which can take the pain and strain out of managing a person’s estate after they’ve gone. It effectively means that the policy will fall outside of the estate and can be accessed immediately, provided there are surviving trustees, without any need for probate.

But there are more general benefits too. Losing someone close is one of the most harrowing experiences we face, and waiting to get a grant of probate to enable a life policy benefit payout can make a difficult situation even worse. A trust can not only result in a quicker payout, it also prevents the life policy claims proceeds being included in an estate for inheritance tax assessment purposes. It can therefore potentially reduce an estate’s exposure to 40% inheritance tax after death.

The policyholder can also appoint anyone they wish as beneficiary of the trust, so it produces the result they want without a will being involved. It also retains privacy as, unlike a will, the trust remains a private document following a death. The placing of life assurance policies in the right sort of trust is especially important in the case of co-habiting couples who have not made wills in favour of each other as, generally, neither intestacy law nor welfare state working age bereavement benefits recognise cohabiting relationships, which are increasing for many families who do not yet have children (and many who do).

If someone already has a life policy which isn’t in trust, if in good health, it’s pretty straightforward to place it in trust but it’s important to seek professional advice as there are different options available.  Life companies normally have a number of draft wordings available off the peg that could well be suitable for personal or business purposes but each trust works slightly differently and it’s important to choose the one that’s right.

Here is a high level summary of the options:

Plain and simple trust

This is the simplest form of trust. Sometimes it’s called a bare or absolute trust. Once you’ve written a bare trust, it can’t be changed. The settlor – the person setting up the trust and putting property, wealth or insurance policies into it – decides who the beneficiaries are and what they want each of them to receive. From then on the property in the trust and any profits from it belong to the beneficiaries listed in the trust. The trust fund falls into the beneficiaries’ inheritance tax estates. It’s not possible to add beneficiaries in the future even if the settlor were to have more children or grandchildren, nor is it possible to remove beneficiaries or replace deceased beneficiaries.

With a bare trust the trustees can’t make any beneficiary over the age of 18 wait before they receive property that the trust is holding for them. This can be a concern if the beneficiaries are young and the trustees think they should wait before they receive the trust property. 

Trust where you want flexibility and appointed trustees to have the ability to make discretionary decisions on your behalf

A discretionary trust relies on the discretion of the trustees. In a bare trust the assets must be distributed to beneficiaries who are over 18 (16 in Scotland) if they ask for them, but with a discretionary trust the trustees can retain assets until they think it is the right time for them to be distributed. The trustees can choose who will benefit and how much they will receive which means that they may ‘pass over’ some of those listed as ‘potential beneficiaries’.

It’s very important, therefore, that you help the trustees by indicating who you would like to benefit from your plan either by naming them in the potential beneficiaries section of the trust or by completing an expression of wishes form which can be kept with the trust form.

New beneficiaries can be added to the trust or removed from this type of trust. This can be useful if, for example, the settlor has another child or grandchild, or if they fall out with someone they previously wanted to benefit from the trust.

One of the risks is that the trustees have considerable influence over the trust, its assets and its distribution. Once the settlor is dead, for example, the trustees could decide not to give some of the trust fund assets to a beneficiary, even though you would have wanted them to receive it.

While this type of trust is very flexible, and the trust fund does not fall into any of the beneficiaries’ inheritance tax estates, the complex tax treatment including inheritance tax periodic and exit charges could lead to the trustees needing to pay for professional tax advice.

Split trust if you want to access the policy proceeds should you be diagnosed as being terminally ill or as having a critical illness

A split trust allows you, as settlor, to split your policy so that you can retain some of the benefits and some are put into trust.

With a split trust, the benefits of the life cover would have to be paid into the trust on death, but the settlor could choose to retain other benefits. These could include the terminal illness or critical illness elements of their cover as these are designed to help protect the settlor’s lifestyle and/or replace income, help pay for care, or for alterations they may need to make to their property. In such cases it would also be advisable for the settlor to have an appropriate Lasting Power of Attorney in place should the nature of their health mean that they lack contractual capability and the ability to manage their financial affairs.

With a discretionary split trust, beneficiaries can be added. As with a standard discretionary trust, one of the risks of this type of split trust is the power that the trustees have. Again, this is one of the reasons why it is important to choose the right trustees.

Johnny Timpson is protection specialist at Scottish Widows