I am reviewing a number of life policy trusts for a living settlor, and would like reassurance that my understanding of the trust and IHT position is correct, as I can find no discussion of this in any of the books or manuals, despite the fact that the situation cannot be that uncommon.
The trusts are from different companies and set up at different times, but all before 2006, and all in the standard format of the time, giving absolute interests to the settlor’s children, subject to an overriding power of appointment. These were PETs by the settlor at the time and qualifying interest in possession trusts thereafter, so no IHT reporting.
However, one of the children has died. There are no express provisions in the trust deeds as to what happens on the death of one of the children. I believe this has the following consequences:
- The absolute interest of the deceased child (still defeasible) now passes to that child’s estate, so the estate now has a non-qualifying interest in possession in that share of the trust funds.
- There is no income at the moment, so the estate is not entitled to receive anything, and the trustees can appoint away from the estate, terminating its interest.
- An appropriate proportion of the value of the policies is included as part of the deceased child’s estate for IHT purposes, and will be chargeable to IHT (payable by the trusts), although IHT will be calculated in the usual way, taking into account the available NRBs and the IHT on the deceased’s free estate.
- The life policy trusts will be relevant property trusts going forward in relation the deceased child’s share.
- When considering whether any IHT is actually payable in relation to the relevant property going forwards, i.e. principle and proportionate charges, we look back at the settlor’s IHT position and cumulative total at the time each trust was created. As they were all PETs at the time, now exempt, (and the settlor had made no other CLTs) this means that each trust will benefit from its own NRB.
Can anyone confirm that they agree (or disagree) with the above?
Diana Smart
Gordons LLP