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.
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