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The “WHAT” of trusts – Probate Trust

12 September 2017

This is the last article in our trust series where we make the trust journey simple and less complex. Over the last few months we have explored gift trusts, loan trusts, discounted gift trusts and excluded property trusts. Now we are going to look at probate trusts and cover-

W – why use a probate trust
H – how to use a probate trust
A – access for the settlor and beneficiaries
T – taxation of the trust

WHY use a probate trust? – Probate trusts are suitable for clients who currently have no inheritance tax liability and do not anticipate having one in the future. It is for clients who have a small estate and they want their family to have easy access to their bond on their death. Typically your elderly widowed client who wants to ensure access quickly without the need for probate. The trust does not need to come to an end on the settlor’s death it can continue as long as is required by the trustees.

HOW do you set up a probate trust? – Probate trusts can be typically used with new bonds or existing bonds which are owned by an individual person – not normally jointly held bonds. An absolute probate trust may cause problems because the settlor is the sole beneficiary of the trust. This means on death of the settlor the trustees of the trust will have to liaise with the executors of the estate to ascertain who is to benefit from the trust fund which means they will require probate. This seems to defeat the purpose of having a trust therefore a discretionary probate trust makes more sense. Normally you can top up a bond that is held in a probate trust.

The dating of trusts can cause confusion and different insurance companies may have different rules, but if it’s a new bond being placed into a new trust, the settlor (the person who is creating the trust) may be able to date both the bond application and the trust deed the same day. If it’s an existing bond that the settlor is placing into trust the trust deed will be dated on the date that the last person signs the trust deed.

ACCESS what access does the settlor and the beneficiaries have to the trust fund? The settlor has full access to all of the bond as he/she is in the class of beneficiaries along with their family. The settlor is also the first named trustee. The trustees can chose to distribute to any of the beneficiaries within the class.

Under a discretionary trust it’s up to the trustees to decide who will benefit and when they will benefit from the trust fund. As long as the beneficiary is in the class of beneficiaries the trustees can allocate funds to them. This is why clients should choose their trustees wisely as ultimately they will be dealing with the trust fund. It is advisable for clients to lodge a letter of wishes with the trustees to give them some guidance, after their death, as to how they want the trust fund divided up. Remember that a discretionary beneficiary cannot demand monies from the trustees, neither does this form part of their estate for divorce, bankruptcy or inheritance tax while inside the trust.

TAX what inheritance tax is payable on a probate trust? A transfer into a probate trust will be a chargeable lifetime transfer (CLT). Under discretionary trusts, clients create CLTs which may attract an entry charge if the value of the gift when added to any other CLTs made in the previous 7 years exceeds the current nil rate band. The CLT will drop out after 7 years as long as no potentially exempt transfers (PETs) are created after the CLT. If a settlor creates a mixture of PETs and CLTs this can lead to a 14 year timeline. If a PET fails and become chargeable it pulls in any CLTs made within 7 years of the failed PET, potentially going back 14 years.
Discretionary trusts may also be subject to periodic charges every 10 years and exit charges which are explained in our Estate Planning Guide on our website.

Also, as the settlor is a potential beneficiary, this will be a gift with reservation. This is why probate trusts are only normally suitable for individuals who have small estates which will not be subject to Inheritance Tax. The value of the bond will be in the settlor’s inheritance tax estate at the time of his/her death. Because of the potential double charge (a chargeable lifetime transfer and a gift with reservation), a special relief known as ‘Double Charge Relief’ is available. This double charge is unlikely to be an issue in the vast majority of cases.

Don’t forget settlors can top up probate trusts. The top up just creates a new transfer i.e. CLT with the 7 year clock starting from the top up date for this new premium.

As you can see trusts don’t have to be complex nor convoluted. Our Technical Helpline will be more than happy to answer any questions that you have. You will find more details on probate trusts on the PruAdviser website.

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