On creation of the discretionary trust in your lifetime, there would almost certainly be no IHT charge. This is because, if you are in reasonably good health, there is no real ‘value’ in the pension policy when it is put into the trust.

At the point the Trustee pays the death benefit across to your discretionary trust (after your death), there is no IHT charge, regardless of the value of the death benefit.

 If there is no trust, while the original lump sum is paid free of IHT, in the event of the death of the beneficiary (usually a spouse or civil partner) any excess may be liable for IHT.  A discretionary trust may be used to minimise IHT on a second death by keeping any death benefits outside of the (for example) surviving spouse’s estate while still allowing them potential access to the funds.

Once the death benefit is sitting in the discretionary trust, depending on its value there may be a small IHT charge 1) whenever a lump sum payment is made out of the trust; and 2) every ten years on the anniversary of the date you joined the IBM pension scheme.  In either case, the IHT charge would not exceed 6% of the value of the assets in the trust, and in many cases it would be substantially less.

 If a 10-year anniversary falls within two years of your death, there will be no charge for that anniversary. Therefore, the first 10-year anniversary on which an IHT liability may arise is the first 10-year anniversary falling after the end of the two years from your death. The trust will benefit from a nil rate band (currently £325,000) which means that there is no IHT payable on assets up to this amount, although this can depend on your circumstances. The maximum charge at the 10-year interval will be 6% of the value of the trust assets above the available nil rate band.

The trust has its own limited annual allowance (£5,500) for Capital Gains Tax and gains would be taxed at 28% above the allowance.

Any investments that generate income would be charged to Income Tax at 45% (based on current rates) but if beneficiaries receive income from the trust, they can recover most if not all of the tax paid by the trust on the income they receive, if they pay Income Tax at a lower rate.

The trust can also be used for the receipt of other monies. It could be used for other lump sums payable on death as well as the lump sum payable from the IBM plans.

You will determine the beneficiaries of the trust.  This would normally be your surviving spouse/civil partner, any children, your wider family and close friends (for example, the guardians of any children), but you could choose anyone you wanted. You also choose the Trustees of the trust.

The IBM Trustee will not be involved in any way once payment of the death benefit has been made to your trust.

A draft discretionary trust has been agreed in principle by the IBM Trustee as being a suitable vehicle in to which sums can be paid e.g. Group Life Assurance money.  The draft document is below, along with other useful information.  Please note, we do not warrant that it covers all eventualities or requirements as there may be other items relating to your specific circumstances of which we are unaware. You may wish to review this document with your solicitor.