Last week, I looked at the IHT implications of changing beneficiaries, incurring an involuntary transfer of value by the “disappointed” beneficiary.
This outcome is a result of the IHT hypothesis that treats the interest in possession beneficiary as having an interest in so much of the trust capital as supports their interest. For example, two equal-sharing beneficiaries would have 50 per cent of the trust capital included in their taxable estate.
With this in mind, what would be the position on the death of a beneficiary with an interest in possession? Well, one would need to look at the trust terms to first determine the destination of that person’s interest in possession. In the absence of anything specific being stated in the trust, the deceased’s interest would pass in accordance with their will.
A liability to IHT would be possible if the value of that person’s interest exceeded the available nil-rate band at the time, taking into account other assets owned by the deceased and chargeable transfers and failed potentially exempt transfers made in the seven years before death, and passed to other than the deceased’s spouse, a charity or the spouse of the settlor.
If a beneficiary shared an interest in possession in the trust property with another beneficiary and their interests were expressed to be held on a joint tenancy basis, the so-called right of survivorship (jus accrescendi, for all you Latin scholars) would apply and the deceased beneficiary’s interest would pass to the surviving beneficiaries.
A joint tenancy means that the asset in which you have the interest is not capable of being disposed of by you on death. It passes automatically.
Despite this, the full value of the deceased’s interest will be included in their taxable estate and will be taxable if it is not exempt, for example, by passing to the widow or widower of the deceased beneficiary.
The IHT downside of an interest in possession trust is therefore this potential transfer of value (a Pet if made during lifetime) when a default beneficiary (one with an interest in possession) ceases to benefit under the trust.
When the policy subject to trust is a protection plan, however, the value in most cases will be negligible or nil (there are, of course, exceptions) and where the policy is an investment bond, then at least on transfer during lifetime the transfer will be potentially exempt, if not exempt.
I would reiterate that this understanding needs to be kept in mind as many pre-March 22, 2006 trusts will continue unamended and thus remain outside the relevant property regime.
Now that we have the relevant property regime to consider as part of our daily estate planning lives, so that there is greater familiarity with its provisions, it may surprise some that more thought was not given to discretionary trusts, even before March 22, 2006, especially in connection with protection plans. The majority of pre-March 22, 2006 trusts were flexible interest in possession trusts.
In the 2006 Budget and Finance Act, it was made clear that provided these flexible interest in possession trusts remain unamended, the IHT provisions that applied to them up to March 21, 2006 will continue to apply.
It was also made clear – thanks substantially to the representations made by the Association of British Insurers – that continuing the payment of premiums into a policy subject to a flexible trust will not trigger the operation of the relevant property regime in connection with that trust.
This relaxation does not apply merely to committed regular premiums. It would seem that, provided the policy document contemplates and permits specif- ically the payment of additional sums into the policy, whether they are they regular or one-off amounts, this will not bring the policy into the relevant property regime.
Originally, April 5, 2008 was set as the date up to which one change of beneficiary could be made under a flexible interest in possession trust without that change bringing the trust into the relevant property regime. In last year’s pre-Budget report, under legislation now contained in the Finance Act 2008, this date was extended to October 5, 2008.
Broadly speaking, this means that there is an excellent opportunity for financial advisers to review flexible interest in possession trusts that were set up before March 22, 2006 to ascertain whether it is desirable and appropriate to change the default beneficiaries.
In most cases, such a trust review will reveal that no change is necessary and even where a change is possible, it may be that the IHT consequences will be unacceptable.
To ascertain whether a change would be desirable, it will be necessary for financial advisers to contact their clients with such trusts to check whether the current default beneficiaries reflect the settlor’s current wishes as to who they would want to be the current default beneficiaries. Where they do not, then a change will be worth considering.
A trust review ahead of October 6 this year could be worthwhile for a number of reasons and I will look at these next week.
In the article that appeared in the edition of August 14, reference was made to the anti-avoidance provisions (resulting in the assessment of trust capital gains on the settlor) where the settlor, settlor’s spouse or minor unmarried children could benefit. With the introduction of the 18 per cent CGT rate, these provisions were abolished from April 6 this year. Apologies for any confusion caused.