A trust of lump sum pension death benefits from a registered scheme under which the deceased member's widow or widower is a potential beneficiary.
The object of the trust is to make sure that the death benefits do not form part of the taxable estate of the widow or widower yet still give them possible access to those funds as a beneficiary to whom the trustees can appoint benefits or lend funds.
FORTHCOMING DEVELOPMENT: The Office of Tax Simplification (OTS) has released a report outlining recommendations to make considerable aspects of the design of inheritance tax (IHT) simpler, more intuitive and easier to operate. One of the recommendations is that the government should consider ensuring that death benefit payments from term life insurance are IHT free on the death of the life assured without the need for them to be written in trust. In relation to pensions, the OTS says that IHT could similarly be simplified by changing the current anomalous position under which some pension policies can be included within an estate for IHT purposes while other comparable pension savings, set up under discretionary trust, are not. The OTS notes that in relation to defined contribution pensions, the main reason discretionary trusts are currently used to provide death benefits is to keep such pension savings outside IHT. For more information, see: OTS Inheritance Tax review: Simplifying the design of the tax, Chapter 6, pp 52–55.This Practice Note addresses how trusts can be used when paying lump sum death benefits from the pension arrangements listed below in order to simplify the payment and moderate any potential tax charges. It considers first how the income tax treatment of the payment can be affected by the type of pension scheme or
Pensions and death This Practice Note looks at the benefits which are payable where a member of an occupational or personal pension scheme dies before retirement without having taken any benefits, or dies while in receipt of a secured pension or in receipt of a drawdown pension. It also examines the impact of inheritance tax (IHT) on the death benefits payable and provides some practical tips on actions members can take during their lifetime to reduce tax liabilities on benefits payable on death. Death before retirement Where a member of a pension scheme dies without having taken their retirement benefits or having taken part of their retirement benefits, the whole of the member’s unvested fund may be used to pay a cash lump sum, or to pay a smaller lump sum and dependants’ pensions, or to pay only dependants’ pensions. From 6 April 2015, the lump sum death benefit and/or survivor’s pension may be paid to a nominee or successor as well as to a dependant. There are no limits on the benefits payable either as a lump sum or as dependants’ pensions, but up to 5 April 2015 any lump sum benefit was tested against the lifetime allowance (see Pensions and lifetime planning—Part 1). Any excess over the lifetime allowance was subject to a tax charge of 55% payable by the beneficiary, otherwise any
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Where an individual’s life assurance policy covers death and terminal illness, is it possible to assign the death benefit alone into trust? What practical steps, if any, need to be considered? The death benefit under a life policy is a chose in action. A chose in action is a thing recoverable by action, as contrasted with a chose in possession, which is a thing of which a person may have not only ownership but also actual physical possession. There is no reason why the death benefit under a life assurance policy cannot be assigned to a trust (indeed, such trusts, known as spousal by-pass trusts, are used commonly for estate planning purposes). However, the policyholder should check the terms of the policy to establish whether there is any restriction on assignment of the death benefit alone, or whether there are any particular formalities stipulated by the
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