Our lifestyle trust 8 Setting up a bond into trust Having considered Mr Smith’s needs and investment goals, his financial adviser recommends that he invests into a Collective Investment Bond with Quilter subject to a Lifestyle Trust. The trust does not oblige Mr Smith to specify the names of his beneficiaries at the outset, but he can complete a letter of wishes to his trustees confirming his intention for his sons and grandchildren to benefit. Any growth in value within the bond will be immediately outside his estate for inheritance tax (IHT) purposes. If he lives for seven years after gifting the bond to the Lifestyle Trust, there will be no further IHT charge on his estate in respect of the £325,000 gift when he dies. (Please see ‘The inheritance tax treatment of the Lifestyle Trust’ on page 9.) Accessing the entitlements The bond, which was taken out on 1 November 2019, is segmented into 1,000 policies worth £325 each. Mr Smith has specified that he would like access to 30 policies every other year, as can be seen in the table below. He believes the extra £9,750 (30 policies with initial premium of £325) plus any growth – will cover any additional income requirements he might have. Mr Smith becomes entitled to Policy Fund A (which contains policy numbers 1-30) on the anniversary date of the bond. When the Policy Fund is cashed in by the trustees and the proceeds returned to Mr Smith, there is no IHT exit charge, although it may create an income tax liability. Once Mr Smith receives the value of each Policy Fund from the trustees it will be within his estate for IHT purposes. When Mr Smith uses the money to purchase gifts for example, the money will no longer be included within his estate for IHT purposes. Deferring access If Mr Smith decides at a later date that he does not require a Policy Fund to be paid to him, he can defer it by writing to the trustees and request a deferral either until a later date or indefinitely. The Lifestyle Trust in action An illustrative example Mr Smith, a semi-retired 68 year old, has an annuity providing fixed income on a monthly basis and works part-time. He has two sons and four grandchildren. Assets His main asset is his house, valued at £750,000 and owned outright He also has investments in various forms totalling £350,000 Income £6,500 a year from his part-time job £9,000 a year State Pension £10,000 a year from his annuity Goal Reduce inheritance tax Supplement income with flexible access to capital, particularly at expensive times of the year such as birthdays and holidays. Investment £325,000 (retaining £25,000 as an emergency fund and not exceeding the nil-rate band) Previous gifts None This case study is fictional and used purely to illustrate a possible real-life scenario. The value of investments can fall as well as rise and investors may not get back what they put in. Growth figures do not include bond charges. Tax saving If Mr Smith dies aged 80, he will have lived more than seven years since creating the trust and having spent all the proceeds from the Policy Funds, the value of the trust is outside his estate for IHT purposes. On Mr Smith’s death, taking into account the value of the Policy Funds (A – F) which have been paid to Mr Smith over the previous 10 years, the value of the remaining investment (policies 181 – 1,000) is £410,000. So, compared to Mr Smith doing no IHT planning, he has saved £410,000 x 40% = £164,000 (assuming the nil-rate band is used elsewhere). Policy number(s) Total number of policies Year of entitlement Policy fund 1-30 30 2021 A 31-60 30 2023 B 61-90 30 2025 C 91-120 30 2027 D 121-150 30 2029 E 151-180 30 2031 F 181-210 30 2033 G
Our Lifestyle Trust For Clients Page 7 Page 9