Trusts have been the subject of major changes in legislation in the last few years. Although change has been enacted under the cloak of realignment and unification, their tax treatment has been viewed by many as an attack on their use.

This article considers their use in a family setting for financial planning and security.

Immediate Post Death Interests (IPDIs) in Wills

A change in legislation in 2007 means that you can now transfer unused allowances for inheritance tax between spouses or civil partners so that they are available on the second death. To many people, this means a return to a straightforward gift in a Will to the surviving spouse on first death (the reference to ‘spouse’ throughout this article will include a civil partner).

Prior to the change in legislation it was common to incorporate a nil rate band discretionary trust into the Will which would come into effect on the death of the first spouse thereby making effective use of the nil rate band for both spouses. The surviving spouse would be included as a beneficiary of the trust.

For those with nil rate band discretionary trust provisions, it is not necessary to change the Will. Retaining these provisions give the executors and trustees flexibility to exercise their judgment on how best to deal with the estate in the circumstances existing at the time of death.

For those who are considering updating their Wills, incorporating an IPDI trust is a useful tax planning measure. It will usually take the form of a life interest given to the surviving spouse. On their death the trust fund will usually pass to the children or grandchildren. IPDI provisions balance the interests of both parties by giving security to the spouse whilst protecting the assets for the next generation.

The Trust can comprise all the assets in the estate or a mixture, for example, the share in the matrimonial home, with the remaining assets passing to the spouse outright. All the inheritance tax benefits available to the spouse will apply to the IPDI.

Such provisions will protect the assets for the next generation in the event of the surviving spouse remarrying or going into care. Whether to give the Trustees a power to advance capital to the spouse should be carefully considered but is not generally recommended in the context of care charge contributions.

Bypass or Pilot Trusts

Bypass trusts are a useful tool for holding lump sum death benefits which may be payable from an occupational pension or personal pension scheme, life assurance policy or insured death in service benefit.

Usually the lump sum is paid to the surviving spouse. This has the effect of increasing their estate for inheritance tax purposes.

A lump sum benefit can instead be nominated to a bypass trust, the beneficiaries of whom will include the spouse and children.

Whilst the spouse will be able to benefit from the trust, the value of it need not be added to his or her estate for inheritance tax purposes. In practice this works by the surviving spouse benefiting from capital and/or income payments and/or a loan made by the trustees. Where a loan is made and remains outstanding at death, the spouse’s estate is reduced by the value of the loan, thereby reducing his or her liability to inheritance tax.

The trust is discretionary in nature and any of the other named beneficiaries can benefit. The ultimate distribution of the trust fund lies with the trustees, who will have flexible powers given to them.

The trust can be set up at the time of joining the pension scheme or taking out the life assurance policy. It can also be set up after that, usually with the trustees holding a nominal sum pending payment of any lump sums made to them.

Thus, despite adverse press, trusts are still an essential tool to:

The tax implications for the use of trusts are complex, and setting them up should be undertaken only with professional advice.

If you require any further advice or assistance please contact Poh Shan Chong or a member of the Wills, Probate, Tax and Trusts team at Wortley Byers on 01277 268347 or pchong@wortleybyers.co.uk.

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