Pension death benefits in trust case study
In this case study we look at the benefit of setting up a trust to receive pension death benefits.
Henry is 63 and still working. His wife Betty died a while ago and she left everything to him. This has made Henry give more thought to what would happen if he died and who he would like to receive his assets. Henry has built up a good pension fund which is worth around £700,000. Apart from his house, this is his main asset. Henry has spoken to his adviser and expects he will retire at 65 when he will commence drawdown from his fund.
Henry has two grown up children in their 20s. John lives with his wife Charlotte but they have a volatile relationship and John expects they will divorce at some point in the future. Henry’s other son Steven is single and lives on his own.
Henry is concerned about John receiving money from his pension fund as this could form part of any divorce settlement. Henry’s adviser discusses using a flexible trust to receive the death benefits when he dies.
The trust is set up during Henry’s life with a nominal gift of £10. This gift would normally fall under one of the inheritance tax (IHT) exemptions so no IHT would be payable. Henry is the settlor and one of the trustees of the trust and he appoints his two sisters as additional trustees. Henry would then let his pension provider know he would like the trust to receive the death benefits from his pension plan when he dies. Henry lets his sisters know he would like John and Steven to be the beneficiaries of the trust. The trust can receive death benefits whether they are uncrystallised or in drawdown.
The benefit of this planning is that as the beneficiaries of the trust are discretionary beneficiaries, no one has an absolute right to any of the benefits of the trust. This means the trust assets cannot form part of any divorce settlement as John has no right to the benefits. The trustees though can pass John or Steven money from the trust when they see fit based on Henry’s wishes.
Henry’s adviser suggests they talk this over at their review meeting each year to decide whether the trust is still required. IHT, income tax or capital gains tax could apply to money in the trust so should be carefully considered if the benefits of the trust outweigh the potential complications.
If they decide there is no longer a need for the trust, they can pay the £10 to the beneficiaries and the trust will automatically come to an end. Henry can then complete a new expression of wish form.
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.