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Trust strategy

In preparing for a recent conference, I was fortunate enough to have had a (mostly drink-based, but nonetheless in-depth) conversation with a few other financial advisers which drifted towards ideas and technical developments in the pension field which are often overlooked.

The following evening, I shared a small number of these ideas with a near neighbour and good friend who happens also to be a senior partner in a fairly sizeable Sheffield firm of accountants. He, and a couple of other locals with whom we were drinking, were so transfixed by the concepts that I decided to make the conversation the topic of this week’s article.

So, here goes: I’m going to focus, over these next couple of articles, on the main issues listed below:

l Death benefit nomination for final-salary pension schemesl Death benefit nomination for money-purchase pension schemesl Wills and spousal bypass trustsl Transferring existing shareholdings into a Sippl Pension sharing in divorce settlementsFirst, then, a few words about death benefit nominations within final- salary schemes. This is an issue I have talked about in a previous article a couple of years ago but which merits more consideration in the light of recent developments.

The latest survey of company pension schemes (both final-salary and money-purchase) confirms the fact that very few pension scheme members take the trouble to notify and/or update the scheme about their choice of beneficiary in the event of their death.

Perhaps, if married, they almost invariably, (and correctly) assume these will automatically pass to their widow or widower, although please note the third issue I discuss below. But what if the client is not married? If the client is in a heterosexual common-law relationship has anyone, either themselves or their financial advisers, given any though to the pension scheme trustees’ dilemma in selecting a beneficiary, especially in the absence of a nomination?

Should the scheme’s death benefits (either a lump sum and/or dependant’s annuity) be paid to a common law partner who has lived with the deceased for? And if so for how long? One day? One month? Six months? One year? Three years? Five years?

This, unfortunately, too often becomes a major problem for the trustees, most of whom are just ordinary people such as me and you who only seek fairness to deserving beneficiaries.

Surely we, as financial advisers, should be the people who make sure that our clients make an appropriate nomination and review it periodically in the light of their changing personal and financial circumstances.

Note in particular, please that annual surveys from the National Association of Pension Funds confirm that an increasing number, now the vast majority, of pension schemes are prepared to pay death benefits to a common-law partner.

This trend includes not only lump sum death-in-service benefits but also a dependant’s pension – but only if they can satisfy themselves that there was a longer-term relationship. So, for unmarried (heterosexual) clients, please ensure they make nomination.

This leads me on to homosexuals. The NAPF survey confirms that, only to a slightly lesser extent than unmarried heterosexuals, more and more pension schemes are prepared to pay death benefits to same-sex partners of a deceased scheme member.

It should be stressed to clients that the need for a death-benefit nomination and a periodic review of that nomination is vital.

Finally, on these first couple of issues, can I confirm that the nomination should be made to the scheme not only with regard to the lump sum death benefit but also for final-salary schemes, in relation to the dependant’s pension which, in fact, is almost invariably more valuable than the lump sum benefit.

Having talked about the financial importance of death-benefit nominations for unmarried scheme members, in opposite-sex or same-sex relationships, I now want to turn my attention to married scheme members.

Almost all of these people nominate, if they bother to make a nomination at all, their spouse. Sounds sensible and obvious but many of them are missing a trick or two. I was made aware many years ago of the merits of spousal bypass trusts within a will and I have since made a particular point of applying this awareness to death benefit nominations for pension scheme members. This point applies equally to final-salary and to money-purchase scheme members.

Let us take an example of a married man with reasonably sizeable retained final-salary benefits and an increasingly significant level of personal pension funds. He changes the nomination of death benefits under both schemes to a will spousal bypass trust.

In a nutshell, this trust does not come into force until the man dies. When that happens, the wife would become trustee and a potential beneficiary of the trust. No inheritance tax at this time, of course.

The trust gives the wife power to pay or (more particularly) lend money to herself at her sole discretion.

Here comes the real value of this strategy – any money that she has not lent to herself from the trust remains within that trust and usually will pass, on her death, free of IHT to the children who are also named as potential beneficiaries.

Moreover, as the trust would only have paid her money in the form of a loan, the value of her own estate will be reduced by the existence of that loan.

In summary, this is an IHT planning strategy par excellence and has tremendous flexibility to cope with future changes in circumstances.

If the couple divorce, then the choice of beneficiaries can be changed. Because the “trust” is written within a will and only comes into force on the man’s death, he is able to change the trust or scrap it altogether.

The trust can be changed to make a new partner the main trustee and a potential beneficiary on a similar basis.

To summarise – ensure that clients always use their death-benefit nomination within both final-salary or money-purchase schemes, especially for those who are not legally married, whether heterosexual or homosexual.

For these people and, perhaps more valuably, legally married clients, a spousal bypass trust written within a will could save huge amounts of future inheritance tax liability.

My near-neighbour accountant friend had never heard of this before and nor had another neighbour who joined our conversation who seemed immediately to identify the benefit of the strategy.

This morning, my accountant friend’s (who I have not previously formally asked to introduce clients to my firm) favoured solicitor (with whom I am reasonably well acquainted, but also had not previously introduced business to my firm) has just phoned me to ask for further information. I sense a couple of new and valuable introducers coming on tap.

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