Interest in a Trust - when beneficiary dies

Trusts Discussion
1

Client’s father put a life assurance policy into trust for the benefit of his two children in 1990

Under the trust deed

  • by default, his two children have absolute interest split equally;
  • his trustees can exercise their discretion to pass the funds to his grandchildren.

One of the children died three years ago’ father has now died.

Questions

1 - We assume that the son’s estate will benefit from the 50% share if the trustees do nothing.

2 - If the trustees decide to exercise their discretion and pass the deceased’s sons share to the grandchildren, what’s the IHT position. If the trustees pass to the Estate I assume no more IHT due, as at the point of son’s death father was in good health.

If the trustees exercise their right there is a termination of a life interest at that point - if the person was a live it would be PET - but what happens for the son who has died - it can’t be a PET - but would his will’s beneficiaries be deemed to have made a PET?

2

Hello,

  1. Subject to the terms of the trust. The monies must be paid to a beneficiary. Not the sons estate.

  2. No IHT. The funds wont form part of the fathers estate normally.

  3. No PET I dont see any termination of a life interest the trust we assume is discretionary.

Richard C. Bishop
PFEP

3

It really depends on the type of trust - is it flexible or discretionary? Normally provider’s standard trusts for life policies in 1990 would have been flexible.

Question 1 - Default beneficiaries will get the proceeds if the trustees normally haven’t distributed the proceeds within the trust period. So, yes if the trustees do nothing on the expiry of the trust period the beneficiary’s estates will benefit. Just check whether it is written within the terms of the trust that the power to appoint beneficiaries ceases within a certain time - sometimes trustees only have the power to appoint within say 2 years after the death of the settlor.

Question 2 - as the trust is pre 2006 and includes a life policy my opinion would be that this is a life policy TSI - link here IHTM16061 - Inheritance Tax Manual - HMRC internal manual - GOV.UK (www.gov.uk)

As I assume that this is a flexible trust on the son’s (beneficiary’s) death the value of his share should have been included in his estate for IHT purposes.

Kim Jarvis

4

Under the more usual pre-2006 life policy trusts, the default beneficiaries have an interest in possession in the policy, and the trustees may exercise their discretion within 2 years of the death of the life assured/grantor to appoint the proceeds of the policy amongst the class of discretionary beneficiaries. This class may also include the default beneficiaries. If no appointment is made, upon expiry of the 2 year period, the default beneficiaries (or their estate) become absolutely entitled.

If the policy in question is subject to such trusts, then upon the son’s death 3 years ago, their IIP in the policy will have been aggregable with their estate for IHT purposes.

Unless the trustees have exercised the power of appointment to deprive the deceased son of “their” IIP, the son’s estate will continue to be entitled to half of the income as it arises. However, until such time as a claim is made and the proceeds of claim are payable there is unlikely to be any income subject to the IIP for either child.

The child’s death does not usually negate their entitlement as default beneficiary.

Accordingly, in answer to the 2 questions:

  1. Yes, the son’s estate will continue to be entitled until, or unless the trustees appoint the trust fund elsewhere within 2 years of the settlor’s/grantor’s death.

  2. The answer may well depend upon how the son’s estate passes, mindful that HMRC may see the disposal as being that of the residuary beneficiaries.

Should the trustees appoint half of the fund to the deceased son’s children that will not attach itself only to the deceased son’s share. If they want the surviving child to “retain” their half share, an exhaustive appointment should normally be made – a half to the surviving child and the other half to the children of the deceased child.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

PO Box 421, Wilmslow, Cheshire SK9 0EX

T: 07712 664127

Email: paul@paulsaunders.net

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