Pensions into family trusts?

Workerdrone

The saying goes "Wealth never lasts three generations". Fingers crossed by the time I pop my clogs I will have a reasonable amount. I will also likely inherit a fair bit which I don't actually need.

The net result being the taxman will want to take a decent bite in terms of IHT.

Despite our best efforts, we can't be sure if our children will be financially sensible. Even more so, we can't be sure their partners/spouses will be. This all got me to thinking. Ideally I would like to set up some sort of trust in later life. I don't know if I need to do this when I am alive or if it can be automatically created on my death.

In either circumstance I am unsure of the tax position.

The aim of the trust is primarily the preservation and to a degree growth of the principal sum. Let's just imagine I keep it just below the LTA for my entire life.

Once I and the wife have gone I would like to trust to perform 2 actions.

1.) Pay out once a year no more than 2.7% of the trusts value split equally between my direct descendants (Including any brought into the fold via adoption)
2.) Only pay out in years where the trust has made a positive gain > RPI Inflation+2.7%+Trust fees.

Why 2.7%? Well I just picked the SWR I intend to use in retirement. It's a little below the 3% many tout. If its good enough for me it will be good enough for my descendants. After all, its free money. If they want more than that they can work for it.

As for the bit about it being an annual payout and only on positive years, well I don't want anyone to become reliant on it. It's a bonus, just a helping hand now and then and I'd like to prevent the principal from being eroded.

In such a way I hope to leave a little bit of a legacy for future generations.

Can anyone offer advice on the tax position on this. I feel I read somewhere that transferring funds into a trust after death had a significant tax hit with some sort of tax credit for the recipient to claw it back. This is less than ideal. I would like to shelter the money from IHT from the outset. It seems very wealthy families do it so it must be possible.

JoeCrystal

Asking the solicitors who specialise in trusts regarding your questions seem to be an excellent idea. A very casual look at the trusts on the HMRC website seems to say that IHT above the thresholds is due anyway and rightly so and potentially every ten years as well. Besides, why do you want to make your descendants' tax affairs more complex?

Silvertabby

How long would this trust last for?  Would it be enough to make meaningful payments to over 100 great-great grandchildren?

Workerdrone

Silvertabby said:

How long would this trust last for?  Would it be enough to make meaningful payments to over 100 great-great grandchildren?

Hmm, well not to be pedantic but my 2 kids would need to have 4 kids each, and those 8 kids would each need to have 3 each to arrive at that problem by the great great grandchild phase.

Given the average UK birth rate is 1.65 and it's not getting easier to have large families (Either financially or fertility wise) I'm less certain that it will happen. But let's just play with figures. Say we stick with the 1.65 birth rate. Assume a generation is 25 years. Assume after 75 years the earlier generations die off so are no longer recipients. By Gen 4 my grandchildren are removed from the picture, by Gen 5 their children, and gen 6 their children.

Paints a bit of a scary picture for family lineage if you are bothered about such things. Which I'm not, because such things are impossible to predict. Some may have no kids, some may die early, some may have loads. All I'm after is leaving a bit of a legacy. The future can sort itself out.

Albermarle

Are you wanting to put your DC pension pot in trust , or some other pot of money ?
The pension is not part of your estate anyway for IHT purposes, as it is already held in trust by the pension trustees.

AFAIK ( although it is a complicated subject) you can not just avoid IHT by using trusts.

Also as a general point about trusts , you can't leave instructions as to what you want to happen as it is not your money anymore. You can only indicate wishes and hope the trustees follow them .

Workerdrone

JoeCrystal said:

Asking the solicitors who specialise in trusts regarding your questions seem to be an excellent idea. A very casual look at the trusts on the HMRC website seems to say that IHT above the thresholds is due anyway and rightly so and potentially every ten years as well. Besides, why do you want to make your descendants' tax affairs more complex?

Thanks for the pointers. I've had a look at the HMRC site. You are quite right. Trust tax treatment is a very complex area. My post at this point is just about mulling over the possibilities as they currently stand. I am a long way from this being a requirement so there's little point in incurring costs discussing it with a solicitor. As Albermale has also rightly stated, money in a pension is outside of IHT anyway.

Perhaps I need to home in a little more on what I am trying to achieve. As I understand it drawdown pensions can be passed down through the generations. I am aware of the tax position for the recipient if the original pension holder dies before/after 75.

What I am not clear on is what happens to the LTA if the pension continues to cascade down the generation in this manner.

Is there an LTA test on death of the original pension holder?
Is the passed on pension then tested for LTA with the new recipient.
Are there any pensions companies out there who are more geared up for treating pensions as intergenerational assets. i.e their trustees attempt to prevent any future generations from totally raiding the pot?

Putting the wider moral picture/socialm etc aside. All I would like to do is to make life a little bit easier for my descendents and stop any black sheep from spoiling it for everyone. I don't think that's too unreasonable a goal.

Albermarle

20170424_AJBIC_New_death_benefit_rules.indd (investcentre.co.uk)

This should answer your questions .
AIU the basics - If you die after age 75, you pension will already have been subject to the final LTA test anyway. Before 75 LTA tests ( or benefit crystallisation events to use the proper terms ) will be performed on the pension on your death .
Once all that is done the beneficiaries will not be subject to any further LTA issues.

Marcon

The problem is that legislation never stays static, so what might looks as if it will 'work' now may not do so when (as is almost inevitable) the law is tweaked, potentially in a way which will impact on beneficiaries even if not on the terms of the trust as established.

Really one for professional advice and https://www.step.org is your best starting point. Even the 'simplified' gov.uk guide to inheriting pensions makes one groan... https://www.gov.uk/tax-on-pension-death-benefits