Canada Life  

Why use a discretionary probate trust?

  • Identify who can benefit from using a discretionary probate trust
  • Explain why they are useful in certain circumstances
  • Describe how a discretionary probate works

Under a bare probate trust the client is absolutely entitled to the benefits during their lifetime and, while the provider would not need to request sight of probate if there is a surviving trustee, the value of the beneficial interest is included in their estate for probate and inheritance tax purposes. 

Under a discretionary probate trust, as the client is included within the range of potential beneficiaries, this will be a gift with reservation so is included in the client’s estate for inheritance tax. But as the client is only one of the potential beneficiaries on death, they do not own the investment, so it isn’t included in their estate for probate purposes. After the client’s death the surviving trustee(s) can use their discretion to make payments to the other beneficiaries without needing probate. 

Consideration also needs to be given to the inheritance tax implications of this type of trust. As this is a discretionary trust it is within the relevant property regime and could potentially be subject to entry, periodic and exit charges. An entry charge would be payable if the cumulative value of all chargeable transfers over a seven-year rolling period exceeds the lifetime gifting allowance. A periodic charge will be payable if, at a tenth anniversary, the value of the trust exceeds the trust’s available nil rate band and exit charges would be payable if an entry charge was paid at outset or a periodic charge was paid at the previous tenth anniversary.

Case Study

Barney’s mother held an investment bond and on death, before the provider could pay out the death benefit, the family needed to apply for probate. Barney didn’t realise how long the probate process could take and that the inheritance tax bill needed to be paid before probate was obtained.

While talking to a professional adviser he mentions the delay in receiving the death benefit, from the provider, due to having to get probate on his mother’s estate. The professional adviser asks him if he has heard of a probate trust? He hasn’t.

The professional adviser explains that the purpose of a probate trust is to speed up payment in the event of death and avoid the delays that can come with probate. Barney is very interested as he also holds an investment bond on his own life and would like to avoid any stress for his family when he dies. But as he is currently taking regular withdrawals, he thought that it couldn’t be put in trust.