Careful estate planning can significantly help to protect your investments from Inheritance Tax on your death and beyond. Talking about and preparing for your death can be difficult, but regular reviews of your retirement planning and using trusts can give you peace of mind that your money is not being lost to tax and it is being passed to those beneficiaries which you chose to provide for after your death.

What is a Spousal Bypass Trust?

A Spousal Bypass Trust is set up separately from your pension scheme. It allows you to protect your pension death benefits from being liable to Inheritance Tax on the death of your surviving spouse or civil partner.

By setting up a Spousal Bypass Trust, it allows you to instruct trustees to make agreed payments from the trust fund to your chosen beneficiaries.

When would you use a Spousal Bypass Trust?

On your death, your estate may be subject to Inheritance Tax if the value of the estate exceeds the Inheritance Tax threshold, currently £325,000.

When pension death benefits are paid out, they are normally free of Inheritance Tax as they are paid at the discretion of the scheme or to a spouse or civil partner.

Many pension schemes are established under a type of trust known as a discretionary trust. This discretionary trust basis means that Inheritance Tax does not normally apply to the death benefits.

The trustees normally have the discretion to decide who to pay the lump sum death benefits to. You can nominate beneficiaries to receive the death benefits, which can be named individuals or a trust which you have set up.

Whilst the trustees are not bound by your nomination, they can take your wishes in to account. They would normally do so unless there is a significant change in your circumstances.

However, if the death benefits are paid to your spouse, it could create or worsen an Inheritance Tax problem if the value of their assets is already close to or exceeds the Inheritance Tax threshold.

You can set up a Spousal Bypass Trust and nominate the trust as the beneficiary to receive all or part of the death benefits from your pension scheme. If the death benefits are paid to the trust, the money held in the trust does not form part of your surviving spouse’s estate and so will not be included when calculating their own Inheritance Tax liability.

Keeping control over the Spousal Bypass Trust

A Spousal Bypass Trust provides flexibility as you can add or remove beneficiaries, or change the terms of the trust. So you still keep some control over your estate, even though it is in a trust. After you die, the trustees can provide loans or make payments to any beneficiaries. This means the surviving spouse could get a loan from the trust fund if they need access to the funds. When they die, this debt would be repaid to the trustees from their estate and would reduce the spouse’s estate.

After you die, the trust should operate in accordance with your wishes. So the trustees should act in the best interests of the nominated beneficiaries.

If you would like us to discuss the issues raised or would like any further information, please do not hesitate to contact us on 0208 464 4242 or email enquiries@wellerslawgroup.com.