Until recently, Flexible Reversionary Trusts (FRTs) were not widely available, but changes to the inheritance tax (IHT) treatment of pensions have renewed interest in trusts that allow clients to reduce IHT exposure while retaining access to their savings. This is exactly what the FRT offers and it’s no wonder it’s Quilter’s most popular trust.
Flexible reversionary trusts have been used in estate planning for many years, although they are often better known by product or brand names, such as Quilter’s Lifestyle Trust.
How the trust works
Your client (the settlor) places an investment bond into trust. It’s a gift for IHT purposes and falls outside their estate if they survive seven years.
The settlor sets a flexible entitlement schedule based on the bond’s policy segments. Each segment represents a slice of the bond’s surrender value. Bonds typically have 100 –1,000 segments.
The schedule splits the segments into groups, which can be any size. Each group has a vesting date, usually the bond anniversary, when the settlor becomes entitled to that group.
Why the trust is so popular
Ahead of the vesting date the settlor could defer a scheduled entitlement, pushing it to a future year. Doing this doesn’t trigger another gift for IHT.
In other words, the settlor has made an IHT efficient gift to the trust, reducing their estate and IHT bill after 7 years and still has the option to access a portion of their capital and investment growth.
Unlocking the flexibility
The flexibility of this trust comes from the schedule of entitlements for the settlor. This can be as complex or simple as you want it to be, but it must be defined from outset. Here’s some points to consider.
Have a plan
You’ve chosen this trust for your client because they require the potential to access capital and growth – but why do they need access and when?
A simple approach may be to spread the bond’s segments evenly over a period, for example, 1,000 segments split into groups of 100 over 10 years. This gives the settlor a rolling entitlement, which can be deferred if not required.
Remember to consider life events which may require higher expenditure. Home renovations, replacement car, holidays, care costs. You can target these years with larger groups of segments.
Break it down
The settlor must take all the policy segments in a group, or none of them. You can increase flexibility by using smaller groups.
For example, if a group has 100 segments, create 10 groups of 10. The settlor can still say that all 10 groups should vest at the same time. But if, as the vesting date approaches, only 60 segments are needed, you can defer four groups and let the remaining six vest.
Regular reviews
The power of this trust lays in the settlor’s ability to defer their entitlements. If they don’t defer, the default position is for the group of segments to vest and return to the settlor’s estate.
The key is for the settlor and trustees to review the schedule regularly and stay on top of deferral instructions. You’ll also need to factor this into your regular reviews.
Summary
Trusts are a powerful planning tool: they can provide for beneficiaries, reduce inheritance tax exposure and still allow clients to retain an element of access where appropriate.
Where that access is needed, it makes sense to build in as much flexibility as possible from the start-use a trust that can adapt as circumstances change, without undermining the IHT planning.
Find out more about Quilter’s Lifestyle Trust
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