Benefits of using a probate bare trust

Have you ever wondered what happens to someone’s investment bond on their death if it is not written in trust?

When someone dies it is essential to deal with their estate, which can be made up of their home, belongings, investment bonds and anything else they may have owned.

But, it is not as simple as someone taking those assets and distributing them. Instead, an official process, known as probate (‘confirmation’ in Scotland), must be followed.

Probate allows a person to take legal control of the deceased’s assets. Before probate is granted, no one has legal title to those assets.

In 2012-13 there were 279,301 estates that needed a grant of probate – which accounted for 49 per cent of all deaths in that year.1

Depending on the complexity of the estate, probate can typically take up to nine months – but complicated estates may take years2, with costs for obtaining probate and administering the estate varying between solicitors. On average, solicitors charge around £5,000 for this.3

These costs may substantially increase if a new proposed fee structure, currently under consultation, is adopted.

In the summer of 2015 a review of Her Majesty’s Courts & Tribunals Service (HMCTS) was announced. Part of this review was to consult on proposals to reform fees for grant of probate applications in England and Wales, and this was published in February 2016.

The consultation outlines a new and progressive regime for grant of probate application fees where the fee paid is based on the value of the estate.

Since 2014, if the estate is less than £5,000 no fee is charged. For estates of £5,000 and over there is a flat fee of £155 if the grant is sought by a solicitor and £215 if the grant is sought by an individual.

The current proposals seek to dramatically increase fees. For estates between £500,000 and £1m, the fee increases to £4,000 (an increase of 1760.47 per cent). For estates over £2m the fee increases by 9202.33 per cent.

Proposed fee structure

Value of estate (before inheritance tax) Current fee Proposed fee
Up to £50,000 or exempt £155/£215 £0
Exceeds £50,000 but does not exceed £300,000 £155/£215 £300
Exceeds £300,000 but does not exceed £500,000 £155/£215 £1,000
Exceeds £500,000 but does not exceed £1m £155/£215 £4,000
Exceeds £1m but does not exceed £1.6m £155/£215 £8,000
Exceeds £1.6m but does not exceed £2m £155/£215 £12,000
Above £2m £155/£215 £20,000

Source: Ministry of Justice

The consultation is now closed but, at a time when HMCTS is undertaking improvements to its service and income raised through probate fees has reached full cost recovery, increases to probate fees look evitable.

So how can the cost of obtaining probate and administering the estate be reduced?

One way is to consider placing an investment bond into a probate bare trust.

Being in trust means that the investment bond is not part of a deceased’s estate and can be cashed in with little formality and no estate costs.

Probate bare trusts have no inheritance tax implications because the absolute beneficiary is the donor. On the donor’s death the beneficiaries become the beneficiaries of the estate. During the donor’s lifetime, because they are the absolute beneficiary they have the rights to all surrenders and withdrawals.

But on death, as the investment bond is in trust, provided there is at least one surviving trustee the company simply needs a copy of the death certificate and a completed claim form signed by the trustees (as legal owners) to pay out – a matter of weeks.

With probate fees potentially increasing from April 2017, a probate bare trust is a really useful tool as it takes the investment bond outside the estate from the point of view of administration.

Also, a lot of people don’t realise that before probate is granted any IHT due on the estate must be paid. This, together with the proposed increases in probate fees, will place a financial burden on executors. Executors may not be able to easily fund both the probate fees and the IHT bill.

An investment bond written under a probate bare trust is paid out to the surviving trustees, who can use the proceeds as a source of funds to help pay any probate fees or IHT bill.

Summary

  • Probate fees are set to increase
  • With a probate bare trust, a death claim payment can be made quickly
  • During the lifetime of the donor, they can receive any withdrawals or surrenders
  • The trustees can use the trust fund to pay the probate fees or any IHT bill
  • Canada Life is one of the few onshore companies that offer a probate bare trust

1 – www.gov.uk
2 – http://www.lawdonut.co.uk/business/law/probate-executors-and-estate-administration/probate-and-estate-administration-faqs#PROEA17 para 17
3 – The Law Society

Canada-Life-logo-NEW