Inheritance planning / APTs (asset protection trusts)

ey143

This is news to me that life assurance policies and death in service benefits do not count towards IHT. Why is that? Is that on the basis of an assumed surviving spouse or some other reason.
Is there such a thing as a DIY Trust setup. I was FCA regulated and trade complex investment products so I am fairly clued up at this sort of level (just not IFA trained) so can handle the paperwork etc.

Thanks again.

agrinnall

Generally life assurance and death in service will pay directly to the beneficiary, so the money is never part of the deceased's estate and is not counted for IHT purposes. Of course, when the surviving spouse dies then what remains of that money will become part of their estate and may have an IHT liability.

ey143

Understood thanks. Why then include such policies in a Trust - to protect it from a spouse's new partner or children's spouses if they were to divorce?

When I was being hard sold the APTs they were including life assurance and death in service benefits in the overall calculation of IHT planning. Maybe trying to hoodwink me into the benefits of APTs.

What are the typical setup costs of such Trusts and thereafter runningn costs?

Thx.

Mattygroves2

The reason it's hard to avoid IHT on your family home is the fact that unless you pay full market rent to whoever you transfer it to you will fall under the reservation of benefits category and for IHT purposes the transfer hasn't happened at all. However the transfer has happened so when it is sold the owner will be liable for CGT from the date of the transfer - so potentially double taxation.

Some things for you to ask the people who are trying to sell you the trust:
- how will a mortgage on the property work ( assuming you don't own outright) as the property will be owned by the trust so they will need to have the mortgage in their name. Will that mean higher rates ?
- if you ever intend to move how CGT will come into play. When you transfer to the Trust you won't have any as it is your PPR but then the CGT clock starts ticking as a Trust can't have PPR relief
- who are they suggesting as Trustees - having them will be expensive
- what the IHT implications are of you continuing to live in the property
- what the IHT implications are on the Trust on an ongoing basis

Trusts can work for IHT planning purposes but are usually done by placing liquid or investment assets into the Trust later in life when you know what your income needs are. Both my late in laws had one which held investments and did their job as they saved approx £80k of IHT when they died. They left the family house out though and also kept the investments they needed to provide their retirement income. The Trusts were kept going until they died and then were broken and the assets split between their two children. Whilst they were running the costs were approx £400 for an accountant to do the tax return for each one plus tax on the dividends received which was then claimed back by the grandchildren when the income was distributed to them. So not a cost free option and although you may be able to do the tax returns the tax pool for working out how much can be distributed is tricky.

If I can persuade my OH that we've got enough stashed in his pension fund to fund our retirement then I will be trying to get him to either set a Trust up for his two kids and two grandchildren or simply gifting more to the two children to avoid IHT. He is almost at retirement though and would only ever do it from spare cash or investments. We have resigned ourselves to the fact that IHT will be payable on our house unless the survivor sells and down sizes and then gets rid of the resultant cash.

If you're brave enough (or sufficiently knowledgable) then buying shares in AIM listed companies and holding for 2 years will take those assets outside the scope of IHT and you still maintain complete control and access to those funds if you need them.

I'm not sure how putting your assets in Trust protects them from your children's future relationship breakdowns. They could protect you from your own marriage breakdown and any future partner of your wife if you die first but until you both die your children don't have any call on your assets unless you allow it so any divorces when you are alive are irrelevant. The likelihood is that as soon as you die they will break the Trust anyway so will get their hands on the assets then anyway.

If you are serious about thinking about this then please get specialist advice from someone who isn't simply trying to sell you something. You certainly need a STEP or suitably qualified lawyer to draw up the Trust deed and do the conveyancing if you put property into Trust and maybe a STEP (or suitably qualified) accountant to explain the full tax consequences. I would have thought a first consultation of an hour or 2 would cost £250 to £300 an hour if you want someone who knows what they are talking about (more in London). After that the deed would be about £500 to draw up.

Trusts are complicated and the discretionary trust that is set up in my OHs will runs to 4 pages and that is a standard all assets (except specific bequests) to Trust on death with wife, issue and further issue as beneficiaries. It's easy to get it wrong if you DIY and you'd also need to pay for conveyancing if there is property involved so £1,000 or so would be reasonable as a setup cost for each one as presumably you'd both need one to avoid the £325,000 limit.

As you are young you might be better getting the basics sorted now - wills (which may involve Trusts), making sure your life assurance and death in benefit are written in Trust so they fall outside your estate, sorting Power of Attourney out for you both, speaking to whoever you'd like to be guardian for your children if you both die together and finally making sure either one of you is able to cope financially if the other dies. Joint accounts for example are really useful for this as the other party can get instant access to any funds rather than gave the funds frozen on death.

Mrs_pbradley936

ey143 wrote: »

Understood thanks. Why then include such policies in a Trust - to protect it from a spouse's new partner or children's spouses if they were to divorce?

When I was being hard sold the APTs they were including life assurance and death in service benefits in the overall calculation of IHT planning. Maybe trying to hoodwink me into the benefits of APTs.

What are the typical setup costs of such Trusts and thereafter runningn costs?

Thx.

The costs can change. My husband's business partner went to university with a chap that went on to become a solicitor. He used this solicitor for everything he could including setting up a trust - the fees were minimal. However, the friend died and the trust went on to be managed by the firm of solicitors (minus the friend). They charged him huge amounts to administer the trust and of course he never got the personal service of things being discussed over dinner then implemented free, gratis & for nothing! He was billed for every phone call, letter and email.


There are also exit charge to consider if having created a trust you then decide it was a bad idea after all. Hence most of us that are au fait with our finances would rather be in charge of them ourselves and only have a trust for the vulnerable. By that I mean children or the elderly that have health and social care needs. Even then many elderly people have sharp minds but some develop dementia and cannot be relied upon to run their own finances because someone unscrupulous might fleece them!

macca1974

Would also suggest seeing a specialist about all this as mentioned by someone in the previous post.

It occurred to me that the other thing that is worth considering in your situation is what is known as a spousal bypass trust....These were all the rage when I worked for an insurance company a few years back on the IFA sales side of thing. Effectively, you get the proceeds of your pension and potentially life assurance paid directly into a discretionary trust (thus avoiding being part of your estate) where your spouse (or you if she pre-deceases you) is a potential beneficiary, the spouse was also a trustee. Therefore the spouse can take what she wants from the trust during her lifetime and the balance never falls into her estate. The other thing that used to get talked about with this type of arrangement was that the surviving spouse could take loans from the trust (interest free repayable on death) that then acted as a negative when calculating her IHT liability on death, not sure if you can still do this. Worth googling as some good insurance company guides come up.

However, this is a complex area and well worth the money to see a professional I would have thought.

Your_Hero

ey143 wrote: »

Understood thanks. Why then include such policies in a Trust - to protect it from a spouse's new partner or children's spouses if they were to divorce?

When I was being hard sold the APTs they were including life assurance and death in service benefits in the overall calculation of IHT planning. Maybe trying to hoodwink me into the benefits of APTs.

Proceeds from death in service do not form part of YOUR estate, but it usually form part of your spouse's. This is because upon death it is usually paid to your surviving spouse. Transfers between spouses are exempt for IHT purposes for UK domiciled individuals, and so IHT is charged on the second death. So DIS would be included in the calculation of IHT.

Life assurances not written in trust will also be included in your estate for IHT purposes.

What are the typical setup costs of such Trusts and thereafter runningn costs?

Thx.

It depends on what type of trust you are looking to set up. Trusts that fall under the "Relevant property" regime, such as discretionary trusts, are the most complex.

Savvy_Sue

Your_Hero wrote: »

Life assurances not written in trust will also be included in your estate for IHT purposes.

Yes, we should have said earlier that life policies need to be written 'in trust' in order not to fall into the estate, but that's a very common way of doing things so the OP may find his life insurance is already 'sorted'.

Dad and Mum took out separate policies 'in trust': one each for my two older siblings. When Dad died the cash from the policy arrived in a matter of days once we'd sent off the death certificate. Although it was in trust for one of them the intention was always to share it (which happened), but if you definitely want it shared then it is best to write it that way.

ey143

Hi

No, my life insurance policy nor my death in service benefits are pointing to any Trusts. I took out a policy when I was 20 to cover some large debts I had (now cleared) and left the policy running for 20 years (£8 pm month) and it expires in a few years time.

I now trade complex investments etc, including my own SiPP so can probably arrange a DIY Trust setup if anyone can pointe in the right direction.

Thx.

Savvy_Sue

ey143 wrote: »

No, my life insurance policy nor my death in service benefits are pointing to any Trusts. I took out a policy when I was 20 to cover some large debts I had (now cleared) and left the policy running for 20 years (£8 pm month) and it expires in a few years time.

Death in service, if it points to your wife, is probably OK, and can almost certainly be changed simply and quickly to point to the children, and I'm not sure you'd need a trust to do that: one would have to be created if you died before they were all 18, but it's a 'cross that bridge' kind of thing.

Changing the life insurance should also be straightforward, it is definitely worth a call anyway.

ey143 wrote: »

I now trade complex investments etc, including my own SiPP so can probably arrange a DIY Trust setup if anyone can pointe in the right direction.

:rotfl: Like a DIY will, remember that it won't be you sorting out the mess if you get it wrong.

Seriously with the amounts involved, it's worth spending for 'proper' advice from - I'd say - a STEP registered solicitor or accountant.