Not sure whom you want to pass your pension funds on to when you die?
A discretionary trust might help.
You are under 75…
If you know whom you want to pass your funds on to, and you are under 75, things could be relatively simple.
But what if you are minded to pass your funds to your son, and loveable as little Johnny is, he is in his early 20s and perhaps hasn’t quite reached financial maturity.
Or what if you think your spouse might need the funds? Is there a way to keep a degree of flexibility in the arrangements?
One option might be to organise matters so that your pension funds, on your death, are paid directly to your spouse. The funds would pass to your spouse tax-free, and he or she could then spend the capital, give some of it to Johnny, or give all of it to Johnny. That might work, but it could mean that your spouse dies leaving capital that he or she didn’t need which then suffers inheritance tax (IHT).
An alternative solution, then, where there are questions as to who should receive the funds, is to pay the death benefits to a discretionary trust. Under such an arrangement the funds would be passed tax-free to the trust and the trust could hold and invest the capital. They would have discretion to pass capital or even lend capital (this would be very effective for IHT planning) to your spouse, to Johnny, or indeed to any other beneficiary. To protect your spouse, however, it may be sensible to appoint him or her as a trustee, giving them some control over the funds.
You are over 75…
If you are over 75, your family’s situation might be more stable than it was when you were younger, but you may still not be sure whom you want to pass funds to.
Again, a trust could be used here, but this time, because the deceased was over 75, the trust would receive the funds net of 45% (this year, and in future tax years – 45% being the trust rate of income tax).
Perhaps a better way to organise matters, then, would be to split the funds between, say, Johnny and your spouse, directing them to pension arrangements in their names. Another option would be to have the funds paid to your spouse’s pension so that he or she could pass funds on to Johnny as and when they felt comfortable doing so (although there may be some IHT implications here). Or you could pass the funds on your spouse’s death to Johnny’s pension fund, potentially without any tax implications.
When you look at all these options, even if you are uncertain as to whom you want to pass your funds, 45% tax seems a high price to pay for flexibility or control.
Richard is a Chartered financial planner, Certified financial planner, Fellow of the Personal Finance Society, Fellow of the Institute of Financial Planning, and Affiliate of the Society of Trust and Estate Planning. He works with clients in Scotland and in London and has particular expertise in helping individuals and families pass wealth down the generations. View Richard’s profile here.
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