The essentials

Gift Trusts

• This type of Trust is used to gift the whole benefit of the policy to another person or people – for instance, a term assurance for family protection would usually be written in Trust for the spouse or minor children
• An onshore investment bond could be used to gift a lump sum and ensure all growth is outside of the estate, as well as the initial investment after seven years
• A whole of life policy to pay the Inheritance Tax payable on death would usually be written in Trust for the estate beneficiaries
• A Gift Trust can be a Bare Trust, Discretionary Trust (life policies and investment bonds) or a Flexible Trust

Discounted Gift Trusts

• The Discounted Gift Trust is a lump sum investment, held under Trust
• It potentially achieves an immediate discount in the value of a client’s investment into an onshore investment bond, based on part of the gift that is put into Trust – this can be helpful for Inheritance Tax purposes
• The Settlor retains the right to receive a fixed sum each year for the rest of their life and all other benefits under the policy are for selected beneficiaries

Loan Trusts

• The Settlor creates a Trust and lends the Trustees an amount to invest in an onshore investment bond
• A loan agreement states that the loan is repayable to the Settlor on demand, and is usually repaid using the 5%pa (tax deferred) allowance on bonds
• This way, there is no immediate tax liability (as there is no gift at outset)
• The growth on the bond is kept out of the Settlor’s estate and held on the terms of the Trust for the beneficiaries

Probate Trust

• A Probate Trust is designed to speed up the payment of benefits to Trustees, without the need for a Grant of Probate (GOP) or letters of administration
• The Trust is discretionary and has a wide range of beneficiaries, which also includes the Settlor – the Settlor can therefore access the funds during their lifetime at the discretion of the Trustees

Life Cover

Once an Inheritance Tax liability has been established, it’s important to understand what life cover is required. This can be affected by the following factors:

• Whether gifts have been made or are planned
• Any reduction in the potential IHT liability through annual exemptions, discounts on a Discounted Gift Trust, or reclaimed RNRB (where tapering applies to estates above the £2m threshold)

The remaining value of gifts to be made now should be covered by term assurance, and whole of life cover may be appropriate for the rest of the liability.

More to think about

• Whether to create a new Trust or add to an existing Trust
• Delaying new Trusts until an existing Chargeable Lifetime Transfer is 7 years old
• Are term assurance policies are in Trust – or should they be?
• Should a lump sum benefit should go to the partner, or should the client change the nominated beneficiary?