In light of probate fee increases, is now the right time to take out an investment bond and wrap around a probate trust?
From April 2019, the amount of probate fees payable will depend on how much the estate is worth, meaning some estates will pay almost £6,000 more than the current flat fee. These fee increases leave advisers with interesting choices: is not the right time to use a probate trust? And what kind of probate trust is the right one?
Choosing the right probate trust
When valuing the estate for probate purposes you must include everything that was owned, by the deceased, immediately before death. This would not include failed gifts or assets held in trust for the deceased both of which would be included for inheritance tax purposes.
Clients face a choice between two options when using a probate trust to speed up the distribution of assets after a death – should they use a bare probate trust or a discretionary probate trust?
Under both the client can still receive benefits from the policy (withdrawals or partial surrenders). However on death the family does not have to wait for the formalities of probate to be completed, provided that there is at least one surviving trustee and the value is not included in the estate for probate purposes.
Probate Discretionary Trust
Assessing whether inheritance tax entry charges, periodic charges every ten years and exit charges apply, as well as the annoyance of sending in forms even if no tax is payable, is a probate discretionary trust worth it?
A transfer into a probate discretionary trust will be a chargeable lifetime transfer (CLT). This will create an entry charge if the value of the gift, when added to any other CLTs made in the previous seven years, exceeds the current nil rate band (£325,000).
On each and every tenth anniversary the trustees will need to assess whether a periodic charge is payable. A periodic charge will be payable if the value of the trust plus distributions to beneficiaries in the previous ten years exceeds the trust’s available nil rate band. If the value of the bond is within the available nil rate band no periodic charge would be payable but the trustees still need to follow their ongoing administration duties and complete paperwork where required.
With a probate discretionary trust there can be a wide range of potential beneficiaries as well as the settlor. As the settlor is a potential beneficiary, this will be a gift with reservation. The value of the bond will be in the settlor’s estate for inheritance tax purposes at the time of death, but there is the potential to benefit from the double charge relief.
As the settlor is not the sole beneficiary, under the probate discretionary trust the trustees also have the authority, and the discretion, to make payments to the intended beneficiaries of the trust, without any need for probate.