Putting an investment bond in trust and appointing trustees can ensure that on a client’s death the provider can deal directly with the continuing trustees without the need for probate. But you find that where clients, during their lifetime, need the ability to access their investment the bond is not normally written in trust.
Using a probate trust
Using a probate trust can negate the need for obtaining probate on death while allowing clients to retain access to withdrawals. A probate trust can either be written on a bare or discretionary basis and can ensure the family does not have to wait for the formalities of probate to be completed, if there is at least one surviving trustee, before they can access the investment.
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.
