Changing Default Beneficiaries (IIP Trust)
Under an interest in possession, power of appointment trust, it is possible to change the list of default beneficiaries.
Persons may be added or deleted. (However, any persons added to the list of default beneficiaries can only be added if they are already named, either as an individual, or among a class of potential beneficiaries, such as 'my children' or 'my grandchildren'.)
For example, if you wanted to add a child born after a trust had been set-up, this is easily done and prior to trust tax rules being changed by Gordon Brown on 22 March 2006, children born after a trust had been set-up, would indeed, normally be added to the list of default beneficiaries.
This will be treated as a partial transfer from the other default beneficiaries, for example, a previously sole named default beneficiary child would have been a 100% default beneficiary, but on the naming of a (new) sibling, the original 100% default beneficiary child would become a 50% default beneficiary, along with the newly-named sibling.
This partial transfer of benefits will have no adverse Inheritance Tax consequences, if the policy concerned is a form of term insurance, such as family income benefit, level term or convertible term, as these policies have no value except in the event of a claim.
(Technically, it would be a potentially exempt transfer, See HM Revenue & Customs) but as there is never any surrender value of a term type life policy, the amount transferred is zero, which is why it is of no consequence.)
However, the Inland Revenue may regard the policy as having a value if the insured person is in gravely poor health at the time of the transfer.
Therefore, it may be better not to make a change to the default beneficiaries if the insured person is in gravely ill health. However, this is a complex area, and we recommend that you contact us for advice before making any changes to the default beneficiaries.
However:
If any changes are now made to the default beneficiaries, this will have the effect of changing the Inheritance Tax treatment into the post-22 March 2006 taxation. (See Discretionary Trust Taxation.)
Therefore, it may be preferable to leave the default beneficiaries as they are.
Any children born after the trust has been set-up will be included among the list of potential beneficiaries, so the trustees would be able to appoint benefits to them in any event.
If future children are not added to the list of default beneficiaries, and are simply among the list of potential beneficiaries, and in the event the trustees choose to pay money from the trust to a potential beneficiary, then it would be classed as a potentially exempt transfer from the default beneficiary or beneficiaries.
This means that an Inheritance Tax liability could arise if one of the default beneficiaries should die within seven years of the money being paid to a potential beneficiary.
However, each person in the UK (including minors) has their own nil-rate band before Inheritance Tax becomes payable.
Even if a default beneficiary were to die within seven years of money being paid from the trust to a potential beneficiary, providing the total amount of the deceased default beneficiary's estate is less than the nil-rate band at the time of their death, there will still be no Inheritance Tax liability.
