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Spousal Bypass Trusts, a terminology widely used by independent financial advisors, otherwise known as a discretionary trust, have been around for a long time and have been designed to protect a spouse from paying inheritance tax (IHT) on any pension death benefits. However, thanks to recent changes in the law, many people may not need to hold any death benefits in trust and may be able to be passed down through the generations - as long as they remain in their pension “wrapper”.
What is a Spousal Bypass Trust?
Essentially, they allow an individual to place their pension lump sum or life insurance scheme death benefits into a discretionary trust, without them forming part of their estate when they pass away. It means a surviving spouse could benefit from these IHT free - as long as they are distributed from the pension scheme within two years of the member’s death.
Changes to the law
However, many have said the need for such a trust is no longer required, due to new legislation introduced by the Taxation of Pensions Act 2014. It means many of the benefits contained in a Spousal Bypass Trust can be passed on through generations free from IHT as long as they remain within that pension wrapper.
Things to consider
With the increase in blended families, some pension holders may prefer to have a greater degree of control in relation to the funds. As such, the recipient of a pension fund is not obliged to carry out the wishes of the original member, so other family members may not benefit as they had hoped.
Therefore, if a spouse remarries and nominates their new husband or wife as the beneficiary, on inheriting, the new spouse may choose to pass on funds to their own children as opposed to the original member’s bloodline.
Before setting up a Spousal Bypass Trust, it is important to check how the scheme distributes death benefits. If spouses wish to pay a specific individual or have no wish to pay the member’s estate or a particular beneficiary, then a Spousal Bypass Trust may be the best option. For family situations that are more complex, then it is worth considering one in order to have a greater degree of control.
It is vital to give guidance to the trustees by placing a letter of wishes addressed to the trustees. Whilst such a letter of wishes is not a legally binding document your choice of the trustees is important to ensure that they carry out the spirit of your wishes.
If you would like some more information relating to the Spousal Bypass Trust, contact the Private Client team at Downs Solicitors to see how we can help.