Understand how a Probate Trust can ease the process on death of an insurance bond owner
A Probate Trust allows the funds to be speedily accessible to beneficiaries on the death of the settlor.
It’s for individuals who will not have inheritance tax to pay on their estate on death.
The Probate Trust gives the settlor full access and control of their bond while alive.
What is a Probate Trust?
A Probate Trust allows an individual to place an asset, such as an insurance bond, into trust and retain control and access. Its primary goal is to allow quick access to families on the death of the individual.
It’s suitable for clients who currently have no inheritance tax (IHT) liability and do not anticipate having one in the future. It’s for clients who have a modest estate and want their family to have easy access to their bond on their death. A typical client might be an elderly widowed individual who requires lifetime access to their investment but thereafter wants to ensure quick access for beneficiaries without the need for Probate. The trust does not need to come to an end on the settlor’s death, it can continue as long as is required by the trustees.
How is a Probate Trust structured?
Probate Trusts can be typically used with new or existing bonds which are owned by a single individual - not normally jointly held bonds. An Absolute Probate Trust may cause problems because the settlor would be the sole beneficiary of the trust. This means on death of the settlor, the trustees of the trust could access the bond proceeds quickly, but the proceeds would then need to be distributed by the executors under the terms of the will/intestacy. The executors however would firstly need to obtain probate! This seems to defeat the purpose of having a trust and therefore a Discretionary Probate Trust makes more sense. Normally it's possible to top up a bond that is held in a Probate Trust.
How is a Probate Trust set up?
In the main if it’s a new bond being placed into a new trust then both the bond application and the trust deed may be dated the same day. If an existing bond is being placed into trust, then the trust deed will be dated when the last person signs.
What access does the settlor and the beneficiaries have to the trust fund?
The settlor will have full access to the bond as he/she will automatically be included within the class of beneficiaries along with certain family members. The settlor will also be the first named trustee. The trustees can choose to distribute to any of the beneficiaries within the class.
Under a discretionary trust, it is up to the trustees to decide who will benefit and when they will benefit from the trust fund. As long as the beneficiary is in the class of beneficiaries the trustees can allocate funds to them. This is why clients should choose their trustees wisely as ultimately they will be dealing with the trust fund.
It is advisable for clients to lodge a letter of wishes with the trustees to give them some guidance, after their death, as to how they want the trust fund divided up. Remember that a discretionary beneficiary cannot demand monies from the trustees nor does this form part of their estate for IHT purposes while inside the trust.
What inheritance tax is payable when using a Probate Trust?
A transfer into a discretionary Probate Trust will be a chargeable lifetime transfer (CLT). This will create an entry charge if the value of the gift when added to any other CLTs made in the previous 7 years exceeds the current nil rate band. The CLT will drop out after 7 years as long as no PETs are created after the CLT. If a settlor creates a mixture of PETs and CLTs this can lead to a 14 year timeline. If a PET fails and becomes chargeable it pulls in any CLTs made within 7 years of the failed PET thus potentially going back 14 years.
Discretionary trusts may also be subject to periodic charges every 10 years and exit charges which are explained here.
Also, as the settlor is a potential beneficiary, this will give rise to a gift with reservation. The value of the bond will be in the settlor’s IHT estate at the time of his/her death. Because of the potential double charge (a CLT and a gift with reservation), a special relief known as 'Double Charge Relief' is available. This double charge is unlikely to be an issue in the vast majority of cases.
If a settlor wishes to top up / increment the bond, this creates a new transfer for IHT purposes i.e. a CLT, with the 7 year clock starting from that date.