For example, if the settlor wishes for their two daughters to be beneficiaries of the proceeds of the bond he should ensure that the daughters are named as potential beneficiaries under the trust. He could also make them additional lives assured to ensure continuity of the bond after his death. As the daughters are beneficiaries of the trust, on the settlor’s death, it enables the trustees to immediately assign an equal amount of segments to each of them without needing to apply for probate.
Probate Bare Trust
Creating a probate bare trust is a simple method of removing the need for a grant on the death of a policyholder – reducing administration duties.
Here the trust deed transfers the investment bond into trust where the policyholder is the sole beneficiary. Legal ownership is transferred to the trustees but as the policyholder is the absolute beneficiary they can receive future benefits from the policy at any time.
Probate bare trusts have no inheritance tax implications and as the policyholder is the absolute beneficiary the value of the bond will be in the policyholder’s inheritance tax estate at the time of their death.
Upon the death of the policyholder, those individuals who are entitled under the deceased’s estate (either under a valid will or through the intestacy rules) become absolutely entitled to the property held in a bare probate trust. Once the proceeds have been received by the surviving trustees, they have the choice to:
- reinvest the proceeds until probate has been granted on the deceased’s estate
- distribute the proceeds to the beneficiaries of the estate, or
- make a loan to them.
A probate bare trust offers trustees ease as there are no inheritance tax reporting requirements and as the trust is not subject to the relevant property regime there are no periodic or exit charges.
Probate discretionary trust:
- gift into trust is a chargeable lifetime transfer
- relevant property regime applies with reporting requirements, possible periodic and exit charges
- increased administration duties
- on the policyholder’s death the trustees can distribute to any one, or more, of the potential beneficiaries.
Probate bare trust:
- no inheritance tax implications
- relevant property regime does not apply
- on the policyholder’s death the trustees can distribute the proceeds or make a loan to the estate beneficiaries, once probate has been obtained.
The main objective of a probate trust is to fast-track the process by avoiding delays on death. Provided there is at least one surviving trustee, the company simply needs a copy of the death certificate and a completed claim form signed by the trustee (as legal owner) to pay out – a matter of weeks.
But with an increase in probate fees, potentially, from April 2019 a probate trust can be used to reduce the value of the estate for probate and in turn reduce the probate fees - is now the time for clients to effect an investment bond and place it into a probate trust?
Kim Jarvis, Technical Manager, Canada Life
Francesca Gandolfi, Technical Manager, Canada Life