Estate Planning Guide

Flexible Reversionary Interest Trusts (FRIT) This is a less commonly offered arrangement than DGTs and plans do vary. But generally, they are structured as follows: • The settlor invests in a series of single premium offshore endowment life assurance policies or unit trust/OEICS; each policy or investment has an identical initial value and each has a specified term, at the discretion of the Settlor to meet their objectives. Often, a “conveyor belt” of reversion ‘parcels’ is established with sequential maturity dates set at the end of year 1, year 2, year 3 etc. up to the end of year 10. • Where applicable, each policy will usually have a maturity benefit, a death benefit, a power to extend the maturity date and, in some cases, a surrender value. • In some cases, the settlor retains the right to every maturity value (this is the only retained right) and gifts all other equitable rights into trust. In others, the settlor gifts all rights to a trust under which they retain the right to maturity values. Under some arrangements, the gift is to a Bare trust, under others it is to a Discretionary trust. Some arrangements offer the settlor a choice. • The settlor and their spouse or civil partner are excluded from benefitting under the trust, except from the annual potential reversions. A widow or widower can be included as a beneficiary. • If the settlor does not actually need or want to receive the maturity value, the trustees are able to exercise their discretionary power of extension so that the reversion is deferred to a later anniversary. It will continue to exist and the death value (and surrender value if it exists) will continue to be held upon trust for the beneficiaries. So, the structure of a FRIT is based on the carve out principle, with the maturity values carved out from the other rights of the policies or investments. Because the settlor retains no interest in either the death benefits or the surrender values where applicable, these elements of the plan should not be subject to either Pre-Owned Asset Tax (POAT) or the Gift with Reservation of Benefit (GROB). Since the right retained by the settlor is not certain to generate any income as a result of the trustees’ overriding power to defer the reversion, it should have little or no open market value for the purposes of an IHT calculation. This lack of certainty of income, could be concerning for clients, but maturity rights are generally held upon Bare trust for the settlor and consequently, if they express the wish to receive a maturity value the trustees are duty bound to take such wishes into account. Overall a FRIT provides a greater level of flexibility than a DGT and can allow clients a greater level of control. A FRIT also offers the advantage of being able to distribute benefits before the settlor’s death. Nevertheless, a DGT affords regular fixed payments which is attractive to some and makes budgeting much easier. Probate Trusts A probate trust is intended to help avoid the delays that come with the process of settling someone’s estate after their death. The indeterminate timeline of the probate process can create significant financial difficulties for the executors and beneficiaries as any IHT due is before probate is granted. A probate trust generally holds a life assurance policy and, if there is at least one surviving trustee, the life insurance company typically only needs a copy of the death certificate plus a completed claim form to release prompt payment of policy proceeds. There are two options for probate trusts: BARE PROBATE TRUSTS The policyholder is the sole beneficiary and can receive future benefits from the policy at any time. On death of the policyholder, the beneficiaries of the estate become absolutely entitled to the property held in a bare probate trust. Once the proceeds have been received by the surviving trustees, they have a choice to reinvest the proceeds until probate has been granted on the deceased’s estate, distribute the proceeds to the beneficiaries of the estate, or make a loan to them. DISCRETIONARY PROBATE TRUSTS The discretionary probate trust allows for flexibility after the death of the policyholder as the trustees have discretion on who to pay from a list of potential beneficiaries. This means that the trust falls within the relevant property regime, so the gift, subject to any available exemptions, to the trustees is classed as a CLT. Consequently, any PETs made within seven years to the chosen beneficiary need to be taken into account. Entry charges to the trust will apply if the value of the asset is above the available NRB and any previous failed PETs may impact the calculation of the periodic charge if the trust still exists on any ten-yearly anniversary. If there is a periodic charge, this will result in there being an exit charge on any benefits paid in the subsequent ten years. Additionally, the CLT into the trust is included in the cumulation count for other estate planning over the subsequent seven years. 45 ESTATE PLANNING OPTIONS Trust Arrangement Summary IHT EFFICIENCY ACCESS TRUST CAPITAL INCOME GIFT AND LOAN TRUST A gift and loan trust only has a minimal gift with the main investment being made up by a loan. The outstanding loan remains in the settlor’s estate and they only have access to loan repayments. In estate Outside estate immediately Capital FLEXIBLE REVERSIONARY TRUST This offers a balance between access and IHT efficiency. It is possible for the settlor to receive all trust property through policy maturities. Out of estate afer 7 years Outside estate immediately Capital and growth DISCOUNTED GIFT TRUST The advantage is having a discount, however the regular payments cannot be changed and if unspent will accumulate in an IHT environment. Part outside immediaty Part outside after 7 years Outside estate immediately Regular payments GIFT TRUST The settlor has no access to the trust property. Out of estate after 7 years Outside estate immediately None SOURCE: CANADA LIFE