TRUSTS TRAINING Jag-Preet Chandi, Trusts and IHT Technical Consultant

WHAT IS A TRUST?? Settlor Trustees Beneficiaries ‘A trust is an arrangement which allows you to gift an asset to an individual or group of people but without giving the intended recipient total control and legal ownership of it.’ Settlor The owner of the plan who transfers legal ownership of the policy to the trustees. Trustees Manage the assets and hold it on behalf of the beneficiaries. They are under a legal duty to exercise their powers for the benefit and in the best interests of the beneficiaries. Beneficiaries The people who you want to benefit.

TYPES OF TRUSTS

TRUSTS FLOWCHART

ABSOLUTE TRUST DISCRETIONARY TRUST Certainty of beneficiaries Trustees decide who to benefit AND when Creates fixed interets Flexibility to update wishes as circumstances change Cannot change wishes Asset protection from 3rd parties If a beneficiary pre-deceases, their estate benefits Ongoing IHT charges – periodic & exit charges

WHY TRUSTS ARE IMPORTANT 4 Key advantages of using trusts Split trusts - gift some benefits and retain others Potential to reduce IHT Timing of payments is flexible (for discretionary trusts only) Can help avoid delays with probate

PITFALLS: COMMON TRUST MISTAKE 1: UNDERMINING IHT EFFICIENCY OF THE TRUST

DEFAULT POSITION INTRODUCED BUT CLIENTS SHOULD STILL COMPLETE Default wording to simplify the process Terminal Illness Benefits default wording

THE PLAN AND ‘GIFTS WITH RESERVATION’ On a WOL plan with LCC or Life Cover with SIC, where a LCC or SIC amount is paid, it draws down on the sum assured reducing the amount of Life Cover left. Where the plan is in Trust and an LCC or SIC claim is made, a LCC or SIC payout partially reduces the Life Cover which has been gifted to trust and will fall foul of the Gift With Reservation (GWR) provisions. These are contained in s102 and Schedule 20 of Finance Act 1986 but effectively mean there’s a ‘gift with strings attached’. Value of the entire plan (WOL with LCC or Life Cover with SIC) added back to the estate on death. 9

SOLUTION The solution is to add 100% PLC or PLSC or LifestyleCare Protector (Level 1) or LifestyleCare Protector (Level 1 and 2) so that the Life Cover stays intact throughout the Plan until death. LifestyleCare Protector (Level 1) – reinstates cover after a level 1 claim. LifestyleCare Protector (Level 1 and 2) – reinstates cover after both level 1 and level 2 claims. Solves the GWR problem! THIS IS A POSITIVE

FOR JOINT LIFE FIRST DEATH POLICIES – 30 DAY REVERSION TO SURVIVING SETTLOR Over the page. As Harry and Julie wish to retain terminal illness benefits, they initial box (a). If they wish to gift the terminal illness benefits to their beneficiaries, they will initial box (b). It is recommended that a client only retains TIB if they are sure that they will spend the funds before their death. Any surplus funds will then fall into their estate for IHT purposes and this may be subject to a 40% IHT charge as well as delays in payment due to the probate process. As Harry and Julie only wish for the survivor to take receipt of the funds only if they survive the first to die by 30 days, they both initial the reversion to settlor box.

WHY TRUSTS ARE IMPORTANT 4 Key advantages of using trusts Split trusts - gift some benefits and retain others Potential to reduce IHT Timing of payments is flexible (for discretionary trusts only) Can help avoid delays with probate

PITFALLS: COMMON TRUST MISTAKE 2: UNDERMINING SPEED OF PAYMENT ALWAYS APPOINT ADDITIONAL TRUSTEE(S)!

WHY TRUSTS ARE IMPORTANT 4 Key advantages of using trusts Split trusts - gift some benefits and retain others Potential to reduce IHT Timing of payments is flexible (for discretionary trusts only) Can help avoid delays with probate

Default Beneficiary default wording PITFALLS: COMMON TRUST MISTAKE 3: CONFUSING POTENTIAL BENEFICIARIES WITH DEFAULT BENEFICIARIES Default wording to simplify the process Default Beneficiary default wording

PITFALLS: COMMON TRUST MISTAKE 4: NOT LISTING INTENDED BENEFICIARIES ON THE TRUST DOCUMENT

WHY TRUSTS ARE IMPORTANT 4 Key advantages of using trusts Split trusts - gift some benefits and retain others Potential to reduce IHT Timing of payments is flexible (for discretionary trusts only) Can help avoid delays with probate

PITFALLS: COMMON TRUST MISTAKE 5: NOT WITNESSING THE TRUST PROPERLY THIS CAUSES INVALIDITY - Date witness signs the deed doesn’t match date of declaration of trust - Witness needs to be independent: not settlor, trustee or beneficiary of the trust

BUSINESS PROTECTION TRUSTS

PITFALLS: COMMON TRUST MISTAKE 6: CAUSING ADVERSE CGT LIABILITIES FOR RLP AND BUSINESS TRUSTS As long as the trust is dated before the policy goes on risk, there should be no adverse CGT implications.

PITFALLS: COMMON TRUST MISTAKE 7: WRONG SETTLOR ON RLP TRUST DEED

PITFALLS: COMMON TRUST MISTAKE 8: NOT APPOINTING ADDITIONAL TRUSTEES FOR COMPANIES WITH A SOLE DIRECTOR-SHAREHOLDER

IHT LITERATURE IHT guide IHT calculator Trust flowchart LPA guide IHT infographic

FAQs See Adviser Guides Answers to lots of Qs Can my client change the Trustees once the trust has been set up? What happens if my client adds more covers to their Plan? Can my client change a gifted benefit to a retained benefit? Why does my client need to complete Default Beneficiaries?

MAIN RESIDENCE NIL RATE BAND

Main residence nil-rate band IHT – WHAT’S CHANGING? IHT nil-rate band and main residence nil-rate band £175k additional ‘main residence’ nil-rate introduced between 2017 and 2020 £1m before couples start paying IHT from 2020 Year Main residence nil-rate band 2017 £100,000 2018 £125,000 2019 £150,000 2020 £175,000 J

IHT nil-rate band and tax bill vs net worth for a couple: IHT – WHAT’S CHANGING? IHT nil-rate band and tax bill vs net worth for a couple: £1m £2m £2.7m £2m the new nil-rate begins to taper away again (tapers away by £1 for every £2 above £2m) 60% marginal rate applies above £2m Net worth

Main residence nil-rate band starts to taper off IHT – EXAMPLE Main residence nil-rate band removed Mr and Mrs Jones have a total estate valued at £1,000,000 in 2015 New main residence nil-rate band introduced Estate <£2m £2m< Estate <£2.7m £2.7m< Estate

TRUSTS IN PRACTICE

COMPLETED DISCRETIONARY TRUST FORM So now, let’s look at how Richard would complete the trust form. Richard as the sole policyholder will be the settlor. He will write his full name and address in Part A of the form. At Part B of the form, Richard will need to insert the plan number or the date of application to identify the policy he is writing into trust. In this case, Richard will be the sole life assured. The trust will be dated on the date Richard signs the form in the presence of a witness. We will look at the execution page a little later on.

COMPLETED DISCRETIONARY TRUST FORM Over to the next page. As Richard wishes to retain terminal illness benefits, he initials box (a). If he wishes to gift the terminal illness benefits to his beneficiaries, he will initial box (b). It is recommended that a client only retains TIB if he is sure that he will spend the funds before his death. Any surplus funds will then fall into his estate for IHT purposes and this will lose the speed of payment benefit and may also be subject to a 40% IHT charge.

COMPLETED DISCRETIONARY TRUST FORM While our trusts provide a default position for default beneficiaries, we always recommend that the client completes this so that he is happy that this will reflect his wishes. In this case, Richard has listed his two children as his default beneficiaries.

COMPLETED DISCRETIONARY TRUST FORM Richard will sign the form in the presence of a witness. The witness can be any adult who is of sound mind and does not have an interest in the trust. So it can be an adviser, friend or neighbour. It cannot be any of the beneficiaries of the trust.

COMPLETED DISCRETIONARY TRUST FORM So now let’s look at how Harry and Julie will complete the form. Harry and Julie as the joint policyholders will be joint settlors. They will both write their full names and addresses in Part A of the form. At Part B of the form, they will need to insert the plan number or the date of application to identify the policy they are writing into trust. In this scenario, both Harry and Julie will be the life assureds. The trust will be dated on the date Harry and Julie sign the form in the presence of a witness. We will look at the execution page a little later on.

COMPLETED DISCRETIONARY TRUST FORM Over the page. As Harry and Julie wish to retain terminal illness benefits, they initial box (a). If they wish to gift the terminal illness benefits to their beneficiaries, they will initial box (b). It is recommended that a client only retains TIB if they are sure that they will spend the funds before their death. Any surplus funds will then fall into their estate for IHT purposes and this may be subject to a 40% IHT charge as well as delays in payment due to the probate process. As Harry and Julie only wish for the survivor to take receipt of the funds only if they survive the first to die by 30 days, they both initial the reversion to settlor box.

COMPLETED DISCRETIONARY TRUST FORM While our trusts provide a default position for default beneficiaries, we always recommend that the client completes this so that they are happy that this will reflect their wishes. In this case both Harry and Julie would like their three children to be the default beneficiaries.

COMPLETED DISCRETIONARY TRUST FORM Harry and Julie will sign the form in the presence of a witness. The witness can be any adult who is of sound mind and does not have an interest in the trust. So it can be an adviser, friend or neighbour. It cannot be any of the beneficiaries of the trust or each other.

ANY QUESTIONS?

THANK YOU!