If Donna survives the diagnosis by more than 30 days, the benefit will revert to her under a bare trust allowing her to access the proceeds for whatever purposes she wishes. This, however, would result in the benefits now sitting in her estate, and potentially subject to inheritance tax.
If Donna unfortunately died within 30 days of diagnosis, then the gifted benefits will be held for the benefit of her discretionary beneficiaries and will be outside her estate for IHT purposes.
What trusts should be used when there are multiple benefits?
Where there are benefits that your client wants to put in trust absolutely for their beneficiaries, but also retain access to benefits like critical illness, a split trust should be used.
The trust works on the basis that the benefit is initially gifted but if the person covered is diagnosed with a critical illness and survives 30 days the trust reverts to a bare trust for their benefit. The trustees can therefore only use the money for the policyholder’s benefit from that point.
Do not forget that where the benefits are paid to the trustees then the trust will need to be registered with HM Revenue & Customs under the trust registration scheme.
Where benefits are paid direct to the beneficiaries on the instruction from the trustee, the trust is not required to be registered under the TRS.
Gregor Sked is intermediary protection development and technical manager at Royal London
