Sometimes Inheritance Tax liabilities are merely deferred – but you may be able to protect benefits from IHT permanently.
Most of us hope that our wealth will be available to be enjoyed by our family when we are gone.
The assets we might think about protecting are savings, property and possessions, but we don’t always think about what would happen to other benefits in the event of our death. Sadly, factors outside your control might mean that proceeds of these benefits are collected by the taxman or claimed by unintended beneficiaries.
If you’re in employment, there is a good chance that there is some form of pension scheme established for your benefit. While this is primarily designed to provide a pension in your retirement, company schemes can also offer valuable death-in-service benefits, should you die before retirement. These benefits are separate from the accrued pension that you pass on, and typically amount to three or four times your salary at the time of death.
For obvious reasons, you may have chosen for such benefits to be paid to your surviving spouse, civil partner or partner; consequently, the benefit is not treated as an asset of your estate. However, once the benefit has been paid to the survivor, it becomes an asset of that person’s estate. When that survivor dies, it could potentially create (or increase) an Inheritance Tax (IHT) liability of 40%.
This is where an Asset Preservation Trust (APT) can play a key role. An APT can hold the death-in-service benefit outside the survivor’s estate for the purposes of IHT, whilst the survivor can still access the funds. Moreover, the trust can be drafted with power to loan monies to the survivor. Not only does this mean the survivor has full use of the funds to invest or spend as desired, but the income or capital can create a debt on that person’s estate and further reduce the value of their own estate for IHT purposes.
Indeed, there are few situations where an APT would not be appropriate for death-in-service benefits, suggests Tony Müdd, divisional director at St. James’s Place.
“Everyone should consider placing the policy into such a trust,” he says.
Can’t touch this
Notwithstanding the obvious benefit associated with IHT planning, Müdd points out that there are numerous other advantages to setting up an APT.
“As the assets in the trust are not directly owned by your beneficiaries, should any form of long-term care provision be required, the local authority will be unable to attribute the value of the trust fund as their asset when conducting a ‘means test’,” he says.
An APT can also prevent your spouse or partner from passing the money onto others who you might not necessarily have chosen to benefit. “Without an APT, if your spouse remarries after you die, your own children may be excluded from benefiting from these funds,” Müdd explains.
A trustee for the APT will need to be selected at the outset and can be anyone you choose. “Naturally, you will want to be sure that the trustee has the expertise needed to carry out their responsibilities,” says Müdd.
If you have reasons not to select family members or friends as trustees, then professional trustees – who are not led by personal involvement and will therefore remain impartial – can be specified when the trust is set up.
As far as the accrued pension wealth is concerned, the case for including it in an APT is far less clear cut. New freedoms have allowed pensions to be cascaded through several generations – tax-free in many circumstances. Whether this means placing your pension in an APT would be beneficial or detrimental should be explored with the help of a financial adviser.
What is clear, however, is that your expression of wish form – used to nominate who you would like to receive your pension in the event of your death – should be reviewed to make sure your money is headed to the right destinations, minimising the tax burden in the process.
Estate planning is about minimising IHT and ensuring your wishes are followed. Ensuring savings and investments are placed in trust is an important part of estate planning, but clearly this can extend to protecting other benefits. Setting up appropriate trusts and arranging financial affairs is not straightforward; it is therefore vital to get financial advice.
“Everyone should talk with a financial adviser about making sure all assets and benefits are held tax-efficiently and go to the intended beneficiaries,” says Müdd. “Unfortunately, many people assume that some benefits are paid free of IHT, but often it is merely a deferral.”
Perhaps you want protection from IHT payable on the death of your intended beneficiary or from claims by others such as banks and former family members. Or perhaps you simply want to ensure that the benefits go to the right people at the right time. Either way, an APT could well be the best solution.
Please note that trusts are not regulated by the Financial Conduct Authority.