The use of trusts

Pam Harris is divorced with one adult son. Robert is her only heir and will inherit everything when she dies.

Based on today’s house prices Pam’s estate would be valued at around £525,000, giving a potential IHT liability of £80,000. In other words, £525,000 – £325,000 (the current nil rate band) x 40%.

Robert doesn’t have any capital to fall back on himself so when his mum dies, he would either need to take out a loan to pay the IHT or sell his mum’s home.

As a result, Pam decides to take out a LifeTime+ plan for £80,000 and put it into a Fixed Trust with:

• Herself as first Trustee and Robert as an additional one
• Robert as the only (and absolute) beneficiary

When Pam dies, the money from her LifeTime+ plan will be paid directly to her son Robert (being the sole beneficiary).

This will enable him to pay the IHT liability straight away and receive the full amount of her £525,000 estate.

Further Considerations

• She may be able to use the ‘Guaranteed Insurability option’ with LifeTime+ to increase her protection without it affecting the Trust.
• If Robert dies first, his interest in the Trust would be included in his estate and be potentially liable to IHT.

Grant and Susan are married, have three grown up children and a total estate of £885,000. They are concerned about passing an eventual IHT liability on to their three children once both of them have died.

They have already made mirror Wills, leaving everything to each other on first death. On second death the estate will pass to their three children. This means that on second death two nil rate bonds will be available to offset against the estate.

Grant and Susan decide to take out a joint-life second death LifeTime+ plan written under a Fixed Trust, with protection of £94,000 for the potential IHT liability. In other words, £885,000 – £650,000 (2 x the current nil rate band) = £235,000 x 40%:

• Grant and Susan are first Trustees.
• Their eldest son Michael, the executor for their Wills, is an additional Trustee.
• All three children are beneficiaries.

Further Considerations

• They may be able to use the ‘Guaranteed insurability option’ with LifeTime+ to increase their protection without it affecting the Trust.

Adam and Lynn have two grown up children. They have already made mirror Wills, leaving everything to each other initially; and then in equal shares to their children.

But, because they have never married, Adam and Lynn are worried about the effect of IHT:

• on the survivor if one of them dies, and
• on their two children if both parents die.

Adam’s estate is worth £400,000 and Lynn’s estate is worth £200,000.

If Lynn dies first, Adam won’t have to pay IHT as her estate is under the current IHT threshold.

If Adam dies first, Lynn will have to pay £30,000 in IHT. In other word £400,000 – £325,000 (the current nil rate band) = £75,000 x 40%.

So Adam and Lynn decide to take out LifeTime+ plan held in a Flexible Trust to help meet the potential IHT liability:

1. One policy is for £30,000 written on a single life basis on Adam’s life in case he dies first:

• Adam is first Trustee.
• Lynn and the children are additional Trustees.
• Lynn is the default beneficiary and the children are potential beneficiaries (if Lynn dies first the children can then be elected as default beneficiaries instead).

On the second death, their children would have an IHT bill of £110,000 based on their parent’s combined estates. In other words, £600,000 - £325,000 (the current nil rate tax band) = £275,000 x 40%.

2. Adam and Lynn take out another Lifetime+ plan for £110,000 written on a joint-life, second death basis and placed in Trust for the benefit of their children:

• Adam, Lynn and their children are Trustees.
• Their two children are default beneficiaries.

Whatever happens, once both parents are dead the money from the LifeTime+ plan will go directly to their children to help them pay the IHT. If Lynn dies first, on Adam’s death the children will receive £140,000 (from the two LifeTime+ policies) – so Adam is effectively over insured in this instance.

Further considerations

Adam and Lynn may be able to use the ‘Guaranteed insurability option’ with LifeTime+ to increase their protection without it affecting the Trust.