Spousal Bypass Trusts

by on 15·12·2015

Unless you share the same view with such celebrities as Nigella Lawson, Simon Cowell and Lenny Henry who believe cutting their children out of the inheritance from their estate will instil in them a need to be self-sufficient, you would likely want to consider utilising the new freedoms in passing on pension death benefits to later generations.

Announced by George Osborne at the Conservative party conference in September 2014, we are all now aware that the new rules allow members to pass death benefits on to a nominated beneficiary who can utilise these monies to access either a lump sum or income free of tax if the original member died before age 75 or an income with the deduction of their marginal income tax rate and lump sums minus 45% tax if the member was older than 75 when they died.

Although these reforms have opened the door for retirement planning conversations and opportunities to utilise pensions as an Inheritance Tax planning tool by passing on pension death benefits to later generations, it does throw into question the use of Bypass trusts as a way of passing on these benefits to a surviving spouse outside of their estate.

At first glance, it appears Spousal Bypass trusts will become a thing of the past as, not only do the pension reforms allow the monies to be passed on outside the spouse's estate, but they also allow these benefits to be paid to the beneficiary in a flexible and tax-efficient way. In addition, as the value paid into the trust will go in as cash, there may be tax due if any income or capital is made on the asset. The Spousal Bypass trust may also fail the primary objective as Inheritance Tax may still be applicable, depending on the amount of the death benefits, and also be subject to periodic charges while held in the trust and exit charges on payment to beneficiaries.

It is worth considering, however, that there are occasions when the Spousal Bypass trust would remain appropriate if, for instance, the original member was concerned with how the surviving spouse would fund any long-term care requirements.

As the new freedoms allow the beneficiary to withdraw 100% of the pension fund as "income" there is some confusion as to whether these monies would be available to the beneficiary when Local Authorities means-test for the provision of long-term care. However, if death benefits are held in trust, even if the surviving spouse is named as a beneficiary, these assets are held outside the spouse's estate in the means-testing calculation.

It is only a matter of time before a case of this nature is tested in the courts and clarification is given, however in the meantime individual cases should be considered with great caution and careful planning.

It goes without saying that ensuring the death benefit nominations on a registered pension scheme are up to date is of the utmost importance as, even if you agree with the celebrities above, it is likely the pension member will want to ensure the benefits are distributed in accordance with their wishes.