Today, many people have a ‘death in service benefit’ either through their employment or their pension scheme which pays a lump sum should they die. They may also have life insurance policies or mortgage protection policies which will pay a lump sum on their death. These lump sums tend not to be subject to inheritance tax upon death. However, without careful planning they can still cause inheritance tax problems for your family in the future.
Generally speaking, most people naturally want to have peace of mind that they have taken care of their spouse should they die, and will nominate their spouse to receive the cash due under these schemes and policies. This will not result in an inheritance tax liability arising on their death if they are married or in a civil partnership. However, the payment becomes part of the surviving spouse’s or civil partner’s estate. When they go on to die in the future, the payment (if it has not been spent) will form part of the spouse or civil partner’s estate and will be subject to 40% tax (depending on the other assets in their estate) at the time of their death.
A great way to plan for this eventuality is to nominate the death in service or pension payment, or sums, which may be due from life or other policies into what is commonly called a Spousal Bypass Trust. The trust is usually discretionary in nature and will have a class of beneficiaries which will include the surviving spouse. Such a trust can be drafted very flexibly to ensure that the surviving spouse is able to benefit from the funds during their lifetime in whatever way is appropriate to their circumstances. This means that the spouse will always be properly provided for. Trustees are appointed under the Spousal By-Pass Trust and they will be responsible for the control of the trust fund. It is common for the surviving spouse to be a trustee so that they can have some control over the use of the trust funds. This provides assurance to the surviving spouse that they will not be left without any say in respect of what happens to the funds. You should also leave a letter of wishes, expressing how you would want the trust fund to be used. Whilst this is not binding on the trustees it does offer them guidance when they come to exercise their powers under the terms of the trust. The guidance given in the letter of wishes will generally be to ensure that the surviving spouse is properly provided for, before making provision for any other family member from the trust.
The advantage of the Spousal Bypass Trust is that, even though the spouse (or civil partner) can be both a trustee and a beneficiary of the trust, (as the trust is discretionary in nature), the assets in it will not form part of the spouse or civil partner’s estate for inheritance tax purposes upon their eventual death. This can save the 40% tax charge mentioned above.
Spousal Bypass Trusts can be set up quickly. Many pension and life assurance companies offer precedent pro forma documentation and while some of these may be sufficient, it is useful to have a solicitor go through the documentation before you sign them to ensure that they fit with your circumstances as they can be inflexible. If you do use the standard forms which are available, then it is important you are sure that they are completed accurately and the correct information is completed in the appropriate way.
Far better than using the standard pro forma documents, is to have a bespoke trust created for you that meets your individual needs. Ellen Fay Solicitors offer the opportunity to draw up such a trust, incorporating all the necessary powers to ensure it will work accurately and suit your particular circumstances. Holding all the death benefits in one trust ‘pot’ can be administratively convenient although, there may be tax reasons to create more than one trust. Additionally, many standard company trusts are time limited which can make them inappropriate. Therefore we recommend that you take legal advice when considering setting up a Spousal Bypass Trust. Such trusts also have their own tax regime, which you should be aware of before setting them up.
If you would like to find out more about Spousal Bypass Trusts, then contact Ellen Fay Solicitors on 01772 722373 for a no obligation chat. You can also contact us via the website at Solicitors in Preston.