Learning Material Sample
Trusts8. Life assurance and pensions in trustsChapter learning outcome: To understand how life assurance policies and certain pension benefits can be placed in trust and the tax and other implications
There are several advantages to writing a life policy or pension arrangement in trust. These include:
Policy benefits can be assured of being paid to selected beneficiaries (via the trustees) Policy benefits normally fall outside the policyholder’s estate for inheritance tax purposes Benefits will be paid directly to th... Shortened demo course. See details at foot of page. ...), the Married Women’s Policies of Assurance (Scotland) Act 1880 and the Law Reform (Husband and Wife) Act (Northern Ireland) 1964.Married Women’s Property Act 1882 (MWPA) This Act allows an individual to set up a trust using a life policy in situations where, aside from the Act, no trust would otherwise be created. We have created this audiovisual presentation to help you understand this topic:
MWPA life policies must be established on an own life own benefit, single life basis. Policies taken out on a ‘life of another’ basis do not meet M... Shortened demo course. See details at foot of page. ...or children only.The Act does not need to be mentioned in the policy but for clarity it is preferable. The words of the policy do not need to expressly declare a trust as long as they are sufficient to bring the arrangement within the Act. Where beneficiaries are not named, but are described by relationship, the wording of an MWPA policy will need to be examined to ascertain exactly who the beneficiary is.
Where the beneficiary is specifically named, policy proceeds vest to that named individual immediately the policy is taken out. If the named beneficiary predeceases the policyholder, this interest passes to their estate on death. So, the death of an absolute beneficiary does not destroy ... Shortened demo course. See details at foot of page. ...tate or to their brothers and sisters, depending upon the wishes of the policyholder. The wording of the arrangement will help determine what these wishes are.It is possible for a power of appointment trust to be established under the MWPA, provided the class of potential beneficiaries is restricted to spouse/civil partner and children. Such an arrangement will provide for flexibility, but it is rare to find such trusts being written on this statutory basis. Trustees of MWPA policies are usually appointed by the policy itself with no further action being necessary to given them legal title. The policyholder can also appoint trustees by a memorandum under hand.
Where a policy is set up for the benefit of a spouse, the policyholder can appoint the spouse or civil partner and himself/herself as joint trustees. Whilst the settlor can retain some control during their lifetime, on death the spouse as trustee can simply and quickly claim policy proceeds by producing the policy document and Death Certificate. The policyholder can retain the power to appoint new trustees, or vest th... Shortened demo course. See details at foot of page. ...icy was taken out before or after it came into force.Advantages and disadvantages of MWPA Advantages of MWPA trusts include: They are simple Only one form is required The policy proceeds are generally protected from creditors Disadvantages of MWPA trusts include: They are for single life policies only (other than in Northern Ireland) The beneficiaries are restricted They are not as flexible as non-statutory trusts Most people who use or are recommended to use trusts need flexibility and, for this reason, MWPA trusts are not widely used and have been replaced by a variety of non-statutory trusts. Policies can be written under trusts outside the terms of the MWPA (or Scottish/Northern Irish equivalents). These are known as non-statutory trust policies.
Non-statutory trusts would be required if beneficiaries are outside the scope of the MWPA. Non-statutory trusts would also be needed if the pol... Shortened demo course. See details at foot of page. ...and and Appointment of Trustees Act 1996 (TLA).Where the policy being written under trust is a joint life second death policy, it is recommended that at least one trustee who is not a life assured should be appointed to ensure that there is someone available as trustee in the event of a death claim. A policyholder can place an existing policy into trust but not by using a MWPA trust.
This takes place by ... Shortened demo course. See details at foot of page. ...When a declaration of trust under a new or existing life or pension policy is made, no stamp duty is payable. There are some key differences between Scottish and English law.
One of these is that, for a trust to be valid in Scotland, actual “delivery” or some other overt act is required to dem... Shortened demo course. See details at foot of page. ...y a Scottish court, unless there is a specific provision that the trust must be governed by English law. Some providers have different forms of trust declaration for policyholders living in Scotland. Where any claim is made on a trust policy, the life office will deal with the trustees as they are the legal owners of the policy. Trustees have a right to claim the policy proceeds on death or maturity. As far as any other dealings are concerned, the trustees should ensure that the trust wording provides them with the necessary powers to do whatever they wish or need to do.
Many trust wordings provide the trustees with wide powers but if these powers a... Shortened demo course. See details at foot of page. ...Third parties acquiring a beneficial interest through assignment under a trust policy should inform the trustees.If all beneficiaries under a trust are 18 or over and of sound mind, they can decide to put an end to the trust and surrender or otherwise deal with the policy under the rule arising from the case of Saunders v Vautier . They might also have some rights to appoint new trustees under the Trusts of Land and Appointment of Trustees Act 1996. Where a person owning a life policy becomes bankrupt, he or she will lose control of that policy because it passes to the trustee in bankruptcy and is used for the benefit of creditors.
A policy in trust, however, is not the property of the bankrupt individual and is... Shortened demo course. See details at foot of page. ...and five years before the bankruptcy, it cannot be attacked unless the bankrupt was insolvent at the time of the trust or became so as a result. The bankrupt will be assumed to be insolvent at the time if the trust was set up to benefit a relative or business associate. Income tax and chargeable gains on life policies in trust
Life policies do not generally create ‘income’ so the rules explained in the previous chapter do not apply. However, one area that could affect the proceeds from life policies in trust is that of ‘chargeable event gains’, as these are just as likely to occur with trust policies as they are with arrangements not written under trust. Prior to the Finance Act 1998, the rule relating to chargeable event gains was as follows: The person chargeable to any gains arising was the settlor, though any tax paid could be recovered from the trustees if necessary If the settlor had died in a tax year before the year of any chargeable gain, there was no one on whom the gain could be taxed – the so called “dead settlor trick” For chargeable event gains arising on or after 6 April 1998 and applying to policies taken out from 17 March 1998 onwards, these rules changed. The new rules are outlined below: If the settlor was both alive and UK resident immediately before the chargeable event, any gain is treated as part of that person’s income. He or she can recover any tax paid from the trustees If the settlor was dead or resident outside the UK immediately before the chargeable event and the trustees are resident in the UK, the trustees are chargeable to any gain; The charge is at the rates applicable to trusts. If the trust is a discretionary or accumulation and maintenance trust, it will have a standard rate band of £1,000, gains up to which are taxable at 20%, with the balance taxable at 45%. Therefore, if gains exceed the trust’s basic rate band, there will be a liability to a further 25% tax on the value of the gains, as credit will be given at 20% for tax already deducted within the fund. No tax credit will be given where the policy is an offshore arrangement The 25% additional charge can be avoided if the beneficiaries are non-taxpayers, basic rate taxpayers or higher rate taxpayers. The trustees simply assign the policies to the beneficiaries for no consideration and the beneficiaries create the chargeable event, which is then taxed at their own income tax rates. This would be of no benefit to an additional rate taxpayer, whose rate of tax would be 45% anyway. Furthermore, because th... Shortened demo course. See details at foot of page. ...oid the company being run by outsiders.Tax on assignments under trust The assignment of an existing policy into a trust is regarded as a transfer of value by the settlor for IHT purposes and a special premium valuation will apply. The value is deemed to be not less than the total premiums paid (gross of any tax relief) with a deduction for any sums previously paid out by way of part surrender. The market value of the policy will apply if it is higher than the premiums paid figure. The market value is generally taken to be the surrender value of the policy. The special premium variation does not apply to term assurances of three years or less, or for those with a term of more than three years where premiums paid in any one year are not more than twice those paid in any other year. In these situations, the market value applies and this would be negligible unless the life assured is in extremely poor health. The special premium valuation rule does not apply to unit-linked policies either, because allowance is made for reductions in the value of units since allocation but not for the bid / offer spread. Death of the life assured When the life assured under a trust policy dies, there is generally no charge to inheritance tax as the policy proceeds do not form part of the deceased’s estate. Death or change of beneficiary If a beneficiary dies with an interest in possession under a trust set up before 22 March 2006 (one that continues to benefit from the transitional relief), the value of the interest forms part of his or her estate for tax purposes. The policy will be valued based on its market value and the tax is based on the deceased beneficiary’s tax rates. However, the tax is paid by the trustees from the trust fund. The premium valuation rules explained earlier do not apply to transfers on death. A completely different regime applies to interest in possession trusts set up on or after 22 March 2006 and older trusts that have lost their transitional relief. The relevant property regime applies to these trusts and, consequently, IHT is payable by the trustees on the 10-year anniversary of the trust and when distributions are paid to beneficiaries. If there is a change in the beneficial interest in possession for some other reason, this is usually ignored for IHT purposes. Some of the main reasons for placing a life policy in trust are:
Family protection – usually term assurance policies on trust for spouse/civil partners a... Shortened demo course. See details at foot of page. ...avings arrangements are set up in trust to enable money to fall outside the estate and lump sum plans are used to reduce the potential IHT bill in several ways Policies written in trust present various advantages: ...
Shortened demo course. See details at foot of page. ...be obtained by using a suitable discretionary trust Income tax
The residency of trustees may affect the income tax liabilities arising under certain types of trust. It is relevant in deciding UK tax liabilities in respect of discretionary trusts, but not interest in possession trusts where the residency of the beneficiary is relevant. Trustees are not considered UK resident for income tax purposes where every trustee is non-UK resident. However, where one of them is resident then all the trustees are t... Shortened demo course. See details at foot of page. ...y on the employee in respect of employer-funded premiums, and no NICs for either the employer or employee. The conditions to be met are:The sum assured must be payable on the death of the employer before age 75 The policy cannot have a surrender value Any ill health benefit can only apply during employment The benefits must be payable to the individual directly or via trustees The main purpose of the policy must not be tax avoidance Nearly all occupational pension schemes are established under trust even though, under the simplified pensions regime, the trust structure is no longer essential.
Setting up an occupational pension scheme will normally be decided upon at a company board meeting and be included in the minutes as a formal board resolution. Theoretically, this alone could establish the trust but in most cases a formal trust deed is drawn up. The company and the trustees will be parties to the deed establishing the scheme. The trust deed sets out how trustees are... Shortened demo course. See details at foot of page. ...efits (within specific classes).Most schemes will ask members to complete an expression of wish form stating who they would like benefits to be payable to in the event of death. The trustees should take account of these wishes but are not bound by them. On most occasions, though, they will pay to the nominated beneficiary(ies). Because of this discretion, the benefits paid are not part of the member’s estate for IHT purposes. Any other interest that the deceased may have had under the pension scheme is also normally exempt from IHT. In this section, we discuss the role that trusts play in respect of personal pensions.
Personal pensions are either established under trust or deed poll. If set up under trust, the provider is usually the trustee and will hold the underlying investment and manage the plan. The individual will be given membership documentation establishing his or her contractual rights. If a deed poll is used, the pension provider executes a deed setting up the scheme, declaring that it will adhere to the legislative requirements and only make payments for approved purposes. Individual policies will then be issued to clients. Each type of scheme must be registered with HMRC. Death before retirement If an individual dies prior to retirement, the contract may pay back a return of fund or return of contributions – or both - and possibly life assurance benefit. Most pension plan providers offer the individual the power to nominate a benefici... Shortened demo course. See details at foot of page. ...ause certain problems with their own much increased estate (potentially leading to IHT on their death).One way of avoiding this problem is for pension death benefits to be paid to a discretionary trust, where the widow or widower is included as a potential beneficiary. The trustees can use the fund to benefit the surviving spouse as well as other family members as and when required, without giving significant capital to an individual beneficiary. These trusts are often established during the member’s lifetime with a small initial gift of, for example, £100. Such trusts are often referred to as “spousal by-pass trusts”, as the surviving spouse is “bypassed” in terms of the receiving substantial capital. This strategy prevents excess capital falling into the spouse’s estate and, as a result, can help to reduce IHT. This type of trust is not so attractive to those who have flexi-access pensions. |
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