Spousal Bypass Trust
A Spousal Bypass Trust is a trust established during your lifetime to be the recipient of any death benefits payable under your pension policies in the event of your death before retirement.
Whilst these payments are free of Inheritance Tax and outside your estate on your death, they are often nominated so as to be payable to your spouse. As a result, your spouse’s estate is increased and on their death the Inheritance Tax due on their estate will also be increased.
If a Spousal Bypass Trust is established and the trustees of that trust are nominated to be the recipient of the death benefit, then in the event of death before retirement, the death benefit will be paid to the trustees. The surviving spouse may still be a beneficiary of the trust and therefore can benefit from it either outright or, more tax efficiently, by way of loans if the need arises. In this way your spouse can benefit from the death benefit without the funds forming part of their estate on their death.
The Spousal Bypass Trust is established during your lifetime with a nominal sum, for example £10. This ensures that the trust is validly set up but it will not hold any significant funds unless there is a payment made to it as a result of your death.
How does the trust work?
The Spousal Bypass Trust is a discretionary trust where the beneficiaries may only benefit as to both income and capital at the discretion of the trustees. The trust is tailor-made to your particular circumstances: you decide whom you wish to appoint as the trustees and also decide whom you wish to be the beneficiaries.
Once you have established the trust, you complete a nomination form in which you request that your pension administrators pay any death benefit to the trustees.
It is also advisable to prepare a letter of wishes to provide guidance to the trustees. The letter might suggest the circumstances in which you would wish the trustees to consider making a distribution and the factors they might take into account.
Are there any tax points that I should know about?
There will be no tax payable when the initial nominal sum of £10 is settled nor when the death benefit funds are paid into the trust. As a discretionary trust, your Spousal Bypass Trust will be liable to a potential Inheritance Tax charge every ten years although this will have no impact prior to your death and before there are any significant funds in the trust.
The amount of the Inheritance Tax payable at each ten year anniversary depends on the value of the fund at that time and will take into account various factors including the current nil rate band and any capital payments that have been made out of the trust. The Inheritance Tax charge will not in any event exceed 6% of the value of the fund and may be less than this.
There may also be an Inheritance Tax charge on capital payments out of the trust between ten year anniversaries and this is calculated by reference to the rate of the preceding ten year anniversary and in any event will not exceed 6% and, again, may be less than this.
Whilst it may seem undesirable to suffer any Inheritance Tax at all, you should contrast this against the 40% Inheritance Tax charge that such funds would otherwise be subject to if they had passed to your spouse and formed part of your spouse’s estate on their death.
Income within the trust will be taxed in the hands of the trustees as will any capital gains, that arise if the funds become invested at a later date.
What about my death in service benefit and my life policies?
A Spousal Bypass Trust can also be nominated as the recipient of any payment made from a death in service benefit and may also be suitable to hold the proceeds of a life policy.
Your Financial Advisor
We always work closely with your Financial Advisors on matters regarding your pensions and life assurance and in this way we can provide maximum benefit to you.
Other points to consider A Spousal Bypass Trust should form part of a general estate planning exercise.
You should also consider:
- a tax efficient Will
- gifts to reduce your estate either outright or to a trust
- Lasting Powers of Attorney
This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.