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:
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.
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
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