Flexible reversionary trusts and estate planning

The suitability of different estate planning solutions will depend on the individual’s own circumstances, needs and objectives. When considering the different solutions available there is a trade-off between inheritance tax (IHT) efficiency and access.

Overall a flexible reversionary trust provides a greater level of flexibility than a discounted gift trust and can offer individuals a greater level of control – this can be attractive as can the ability to distribute benefits prior to the settlor’s death. However, for some individuals a discounted gift trust can still offer advantages. The ability to invest more than the nil rate band should not be overlooked and some people will need, and like, fixed payments – budgeting becomes much easier.

In some instances a combination of solutions can be a suitable alternative; a discounted gift trust to cover known expenses and a flexible reversionary trust for the discretionary expenses. If other funds are earmarked for estate planning then a gift and loan may be a suitable destination, allowing loan repayments after seven years to fund further gifting to discretionary trusts.

This is summarised in the table below:

Trust IHT efficiency Access
Capital Income

No trust

There is no IHT benefit and the individual has full access to the investment.

In estate In estate Capital and growth

Bare Probate trust

Again, there is no IHT benefit as the individual has full access to the investment through the trustees.

In estate In estate Capital and growth

Gift and loan trust

A gift and loan trust only has a minimal gift with the main investment being made up by a loan. The outstanding loan remains in the settlor’s estate and they only have access to loan repayments.

In estate Outside estate  immediately Capital

Flexible reversionary trust

This offers a balance between access and IHT efficiency. It is possible for the settlor to receive all trust property through policy maturities.

Out of estate after 7 years Outside estate immediately Capital and growth

Discounted gift trust

The advantage is having a discount, however, the regular payments cannot be changed and if unspent will accumulate in an IHT environment.

Part outside immediately, part outside after 7 years Outside estate immediately Regular payments

Gift trust

The settlor has no access to the trust property.

Out of estate after 7 years Outside estate immediately None

Many advisers and clients will be more familiar with discounted gift trusts than they are with flexible reversionary trusts, but both solutions have longevity and are suitable in the right circumstances.

This year sees Canada Life notch up 25 years’ experience in administering flexible reversionary trusts and it still offers this solution in the robust double-trust structure of the Wealth Preservation Account, which reaches its tenth anniversary. The flexible reversionary trust is an established, uncontroversial estate planning solution.

Remember that the suitability of a flexible reversionary trust, like any other estate planning solution, will depend on the client's individual circumstances. As with any investment there is risk; the value can fall as well as rise and currency fluctuations can also affect performance.