In light of probate fee increases, is now the right time to take out an investment bond and wrap around a probate trust?
From April 2019, the amount of probate fees payable will depend on how much the estate is worth, meaning some estates will pay almost £6,000 more than the current flat fee. These fee increases leave advisers with interesting choices: is now the right time to use a probate trust? And what kind of probate trust is the right one?
Choosing the right probate trust
When valuing the estate for probate purposes you must include everything that was owned, by the deceased, immediately before death. This would not include failed gifts or assets held in trust for the deceased both of which would be included for inheritance tax purposes.
Clients face a choice between two options when using a probate trust to speed up the distribution of assets after a death – should they use a bare probate trust or a discretionary probate trust?
Under both the client can still receive benefits from the policy (withdrawals or partial surrenders). However on death the family does not have to wait for the formalities of probate to be completed, provided that there is at least one surviving trustee and the value is not included in the estate for probate purposes.
Probate Discretionary Trust
Assessing whether inheritance tax entry charges, periodic charges every ten years and exit charges apply, as well as the annoyance of sending in forms even if no tax is payable, is a probate discretionary trust worth it?
A transfer into a probate discretionary trust will be a chargeable lifetime transfer (CLT). This will create an entry charge if the value of the gift, when added to any other CLTs made in the previous seven years, exceeds the current nil rate band (£325,000).
On each and every tenth anniversary the trustees will need to assess whether a periodic charge is payable.
A periodic charge will be payable if the value of the trust plus distributions to beneficiaries in the previous ten years exceeds the trust’s available nil rate band. If the value of the bond is within the available nil rate band no periodic charge would be payable but the trustees still need to follow their ongoing administration duties and complete paperwork where required.
With a probate discretionary trust there can be a wide range of potential beneficiaries as well as the settlor. As the settlor is a potential beneficiary, this will be a gift with reservation. The value of the bond will be in the settlor’s estate for inheritance tax purposes at the time of death, but there is the potential to benefit from the double charge relief.
As the settlor is not the sole beneficiary, under the probate discretionary trust the trustees also have the authority, and the discretion, to make payments to the intended beneficiaries of the trust, without any need for probate.
For example, if the settlor wishes for their two daughters to be beneficiaries of the proceeds of the bond he should ensure that the daughters are named as potential beneficiaries under the trust. He could also make them additional lives assured to ensure continuity of the bond after his death. As the daughters are beneficiaries of the trust, on the settlor’s death, it enables the trustees to immediately assign an equal amount of segments to each of them without needing to apply for probate.
Probate Bare Trust
Creating a probate bare trust is a simple method of removing the need for a grant on the death of a policyholder – reducing administration duties.
Here the trust deed transfers the investment bond into trust where the policyholder is the sole beneficiary. Legal ownership is transferred to the trustees but as the policyholder is the absolute beneficiary they can receive future benefits from the policy at any time.
Probate bare trusts have no inheritance tax implications and as the policyholder is the absolute beneficiary the value of the bond will be in the policyholder’s inheritance tax estate at the time of their death.
Upon the death of the policyholder, those individuals who are entitled under the deceased’s estate (either under a valid will or through the intestacy rules) become absolutely entitled to the property held in a bare probate trust. Once the proceeds have been received by the surviving trustees, they have the choice to:
- reinvest the proceeds until probate has been granted on the deceased’s estate
- distribute the proceeds to the beneficiaries of the estate, or
- make a loan to them.
A probate bare trust offers trustees ease as there are no inheritance tax reporting requirements and as the trust is not subject to the relevant property regime there are no periodic or exit charges.
Probate discretionary trust:
- gift into trust is a chargeable lifetime transfer
- relevant property regime applies with reporting requirements, possible periodic and exit charges
- increased administration duties
- on the policyholder’s death the trustees can distribute to any one, or more, of the potential beneficiaries.
Probate bare trust:
- no inheritance tax implications
- relevant property regime does not apply
- on the policyholder’s death the trustees can distribute the proceeds or make a loan to the estate beneficiaries, once probate has been obtained.
The main objective of a probate trust is to fast-track the process by avoiding delays on death. Provided there is at least one surviving trustee, the company simply needs a copy of the death certificate and a completed claim form signed by the trustee (as legal owner) to pay out – a matter of weeks.
But with an increase in probate fees, potentially, from April 2019 a probate trust can be used to reduce the value of the estate for probate and in turn reduce the probate fees - is now the time for clients to effect an investment bond and place it into a probate trust?
You can find out more about our range of trusts on the Canada Life website.
Kim Jarvis & Francesca Gandolfi, Technical Managers, Canada Life.
Kim Jarvis has worked in the life industry arena for over 20 years, with experience in trusts and their taxation, product development, the impact of new legislation on the industry and delivering training. She is an affiliate of the Society of Trusts and Estate Practitioners and a Chartered Insurer.
Francesca Gandolfi has over 20 years experience in the industry, having previously worked as a financial adviser focusing on wealth management, IHT planning, retirement planning, and later life advice.