What is a spousal bypass trust?
This is a Trust set up during the lifetime of the clients. Its' purpose is to accept the death-in-service and insurance payouts instead of the surviving spouse. It is a Discretionary Trust, and is governed by exactly the same principles and rules of operation that discretionary Will trusts work by. They are:
Distribution of the trust fund capital and income to the potential beneficiaries is completely at discretion of Trustees
So, conversely no potential beneficiary has any right whatsoever to trust assets
So the Trust Fund cannot be considered to be part of their assets for Inheritance Tax purposes on their subsequent death.
The Discretionary Trust has to have multiple potential beneficiaries. They are usually the surviving spouse/partner, the children, the grandchildren or anyone else who the Settlor (the person who sets the trust up).
Key features of the Trust
The Trustees are usually the surviving spouse, one or more of the children or anyone else appropriate as selected by the client. The usual rules apply to Trustee selection – as this is a continuing Trust they must be reliable and trustworthy, available to act and capable of acting.
Where there are concerns over second marriage syndrome issues, then appointing the surviving spouse as a Trustee can give rise to conflict – in this case appointing others may be more appropriate, but the downside is the surviving spouse has no say or influence over the appointment of Trust assets amongst the beneficiaries, and may lose out!
As with any Trust there is always the possibility of infighting amongst Trustees who all have interests in the Trust as they are also potential beneficiaries, it is always advisable to have an independent Trustee appointed. Again ideally this should be a disinterested party within the family network or if absolutely vital, a professional.
The Trust is set up for a maximum period of 125 years, in line with the updated rules of perpetuity. The Trustees may close the Trust at any point.
What can the trustees then do with the trust fund?
Trustees have considerably flexible powers in what they can now do with the resulting payments made into the Trust Fund, as triggered by the death of the Settler. They have the following powers:
Power to advance capital and/or income as they choose to any or all beneficiaries.
Can advance absolutely, or
Can advance via a loan note to a beneficiary (ideal if beneficiary enters care or Trustees concerned they may not be able to recover the loan over time OR the beneficiary dies – the loan is considered a debt on their Death Estate, and is then subsequently reduced for Inheritance Tax calculation purposes).
Therefore, the surviving spouse effectively can borrow from the Trust the entire Trust contents in exchange for a loan note, which becomes a debt on their estate, repayable on death. Ultimately the surviving spouse has had unfettered use of the Trust Assets but they will not be taxable for Inheritance Tax – on the death of the surviving spouse the Trustees simply pay the recovered debt to any or all of the remaining potential beneficiaries to the Trust.
How can the death-in-service and insurance policies pay to the trust?
For insurance policies where the policy is already written under Trust, it is simply re-nominated to the Trust. Where the policy is not written in Trust yet, then it can be written under Trust and the nominated beneficiary is the Spousal Bypass Trust itself. All that is required is a nomination form from the provider, and re-registering that nomination form with the provider.
Who will benefit from a spousal bypass trust?
Those whose assets in total are worth more than twice the Nil Rate Band…. assuming the Transferable Nil Rate Band is still in existence…!
Those clients where death-in-service benefits or insurance policy payouts create an Inheritance Tax problem on second death (as indicated above).
Those wanting to avoid accrual of assets to the survivor if that survivor then enters care
Those wanting to avoid a direct payment to surviving spouse. "Second marriage syndrome". (the Trust can be utilized to take the place of a direct payment to the spouse – then the Trustees can make decisions on whether to benefit the spouse or not)
These are complex issues and require professional advice, call Martin Wollaston at 0161 486 0653