View more on these topics

Case study: Absolute or discretionary probate trust?  


Betty is in her 80s and lives in England. She has managed to save £150,000 in an onshore bond.

Having worked hard all her life, Betty wants to make sure she passes on an inheritance to her two sons when she dies.

When her sister passed away her nephew had to go through what seemed like a long and complex process to get money released and had to obtain probate, even though there was not a lot in her estate.

Betty does not want her boys to worry and is keen to make sure her funds are made available to them straight away after her death.

The solution

Betty has talked to her solicitor, who explains that probate is the legal right to deal with someone’s property, money and possessions when they die. The solicitor also says there are current proposals that could have the potential to significantly increase the cost of obtaining probate.

Betty’s solicitor suggests that, as her primary asset is her bond, she puts it into a probate trust. Doing so will allow her full access to the bond while she is alive and the trustees can distribute it according to her wishes on her death.

The solicitor discusses the two main types of trust available: absolute probate trust and discretionary probate trust. In both cases the advantage is to speed up payment of policy proceeds on death by avoiding the need for probate in respect of the trustee-owned policy.

The difference between the two is that under an absolute probate trust the settlor (Betty in this case) will be the sole beneficiary. With a discretionary probate trust there is a wide range of potential beneficiaries, including the settlor. This means Betty and her two sons could all be beneficiaries.

From a taxation perspective, establishing an absolute probate trust will be a potential exempt transfer of the value transferred (cash or existing policy) and, as the settlor is the beneficiary, this will be a gift with reservation. The value of the bond will be in the settlor’s inheritance tax estate at the time of his/her death.

A discretionary probate trust will trigger a chargeable lifetime transfer of the value transferred (cash or existing policy). As the settlor is a potential beneficiary this will be a gift with reservation. The value of the bond will be in the settlor’s inheritance tax estate at the time of death and the trustees will be potentially subject to periodic and exit charges as with any other relevant property trust.

Betty’s solicitor explains that normally when assets are placed into trust they are not subject to the normal probate process as the trustees own the assets.

However, under an absolute probate trust the only beneficiary will be Betty. So when she dies, the trustees could access the proceeds quickly but the money would then have to be distributed by the executors after they had obtained probate.

To meet Betty’s stated objectives, the solicitor explains that the more logical route is for her to set up a discretionary probate trust where she and her boys will all be beneficiaries.

This means when Betty dies, the trustees have authority to make payments to her sons without any need for probate.

On the whole, probate trusts are beneficial to people who do not have a large estate as the transfer into trust, the value of the bond, will use up some of the settlor’s nil rate band and will also be a gift with reservation inside the settlor’s estate.

Bonds are considered to be tidy investments inside a discretionary trust as they do not produce income and therefore no tax returns are required. Bonds are also segmented.

In Betty’s case, both her boys are lives assured under her bond and when she dies the trustees will be able to assign an equal amount of segments to each of them without needing to apply for probate.

Helen O’Hagan is technical manager at Prudential


Collins Stewart launches new probate service

Wealth management firm Collins Stewart has launched a probate service to accompany its existing inheritance tax and investment management services.Collins Stewart says the business will help simplify the complicated and time-consuming task of valuing an estate’s investment assets.Collins Stewart chief executive Symon Hawken says: “Collins Stewart has a heritage of innovation and managing wealth. This […]


White paper — Dubai International Insights

Jelf Employee Benefits discusses the legislative changes in Dubai, available medical facilities and policy considerations for employers with expatriate workforces in the country. This edition will be of particular interest to global human resource directors, compensation and benefits specialists and mobility managers who have employee populations in Dubai, or are considering operating there in the near future.

Graphic Content – August

Given the release of employment data from the US on 5 August, we wanted to focus on employment data in this month’s Graphic Content. The Graphic Content below shows us that young and middle-aged workers were hit the hardest by the Great Recession and have never caught up. Since the job market started to recover […]


News and expert analysis straight to your inbox

Sign up


There are 2 comments at the moment, we would love to hear your opinion too.

  1. A very good article and a very useful planning tip.

  2. I think Betty needs another solicitor. If her estate is around £150,000, or below the IHT threshold, probate is simple and quick, and possibly less expensive than creating a trust.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm