Hi,
Spouse has recently died with a reasonable sized estate. Also had a DIS, which the surviving spouse doesn’t need in her estate for IHT purposes. It has been proposed that she sets up a DT with £10 to create a Pilot Trust.
I have asked her to check that the provider can/will pay to a pilot trust.
But, in the meantime, if they pay out to her, could she then proceed with a DOV in usual manner? Or would this not be possible as it is a DIS payment?
Thanks
Kam
You cannot vary a DIS as it is not a disposition of the Will. But receipt of the money may allow the beneficiaries to make a variation of something else in the estate which they otherwise would not. The price of the DIS being IHT-free is that it is held on a DT and the trustees thereof are in charge of where it goes. Most providers as trustees offer the opportunity to make a non-binding lifetime nomination and will accept a pilot trust as a nominee or a request, after the death, by a nominee to pay to the trustee of such a trust of which s/he is settlor (and often trustee) to bypass the money down to the next generation, on sight of the trust instrument. The trust will be a RPT for IHT of which the deceased is the settlor with a commencement date of when the deceased joined the pension scheme.
I suspect that it will be fruitless to try to litigate a refusal by the DIS trustees to pay otherwise than in strict accordance with the terms of the trust although pension trusts have a contractual flavour to them and the deceased will have had enforceable rights which should devolve on the PRs. That will include a right to a DIS but precisely for IHT reasons will not usually allow direction of the DIS or it will be taxable in his estate. If the surviving spouse is the beneficiary of that then a variation of it as part of his estate would be competent but that is not common. If the DIS trustees were prepared to pay the PRs that will not help; the deceased must have had a right to the payment and any intervening discretion, even if exercised in favour of the PRs, will not permit a variation.
A DIS will often indicate that on the facts the surviving spouse may be healthy and young enough to make a PET with 7 year term insurance cover at a modest cost and no problem about liquidity. A DGT for part of the sum up up to the NRB might be an idea. That means that investment policy must be left to the insurer and there is as well as an investment risk a theoretical counterparty risk subject to the standing of the company. An advantage of this for some people is that after initial TRS formalities it presents less of a hassle and cost of compliance and the cluster of policies allows any taxable profit to be minimised by distributions to young beneficiaries before encashment. It will be an RPT but hopefully the spouse will have a nil cumulation so a full NRB will damp down any TYA charge to IHT and the 5% income tax-free withdrawal facility will easily fund it.
Jack Harper
Thanks Jack,
Noted re: not possible to vary the DIS itself - makes sense once you see it in writing! Thanks.
But her setting up a pilot trust in her own right will cause an issue wrt to different settlers. Her for £10 and the deceased for the main DIS payment.
So, either she can set it up with no £10 initially, (but technically she is still the settlor) or the DOV with £10 so that, for IHT purposes the settlor is the deceased.
I take your point that she would be able to vary another element of her estate if she receives the DIS directly. Arguably, I can’t see that she couldn’t do both (assuming she is comfortable with tying up that level of funds).
I will liaise with the financial adviser also.
Thanks again Jack.
We have discussed this £10 on here before. I am in the camp that it is unnecessary and Mr Kessler’s precedents simply say that the Trust Fund means any property transferred to the trustees upon the express trusts. The 2 step process has become so common that it has transmogrified practice into a rule. Sadly like those old cases get cited, even in Manuals, without being read and which turn out to be of dubious authority, if any at all. But the rule is that a trust is valid without £10 but incompletely constituted pro tem, so unenforceable by the beneficiaries, until the trustees acquire trust property and the 3rd certainty is fulfilled. And no TRS until then!
The £10 is the commencement of an RPT. So there are two settlements when the main money enters fom a different settlor.
HMRC presumably ignore that on the usual grounds that it is their tax system and taxpayers are only allowed to participate in it on sufferance.
And if made by the same settlor it is an addition so beware of a CLT between each step! Bet they would not ignore that because it is their duty to collect every £ of tax due and payable (Crocodiles seen weeping in Somerset house, tears of laughter).
Jack Harper
This is helpful.
So, it doesn’t cause an issue (wrt TYA calculation) that the settlor is the spouse for the creation of the trust, but the deceased for the funds? Will HMRC allow just the deceased as the settlor for the purposes of the calculation?
I believe that was why the DOV route was mooted by the adviser, to keep the settlor as the deceased - but on the (mis)understanding that a “£10” was necessary.