Must the Trustees pay benefits to a Default Beneficiary? (IIP Trust)
The trustees do not have to pay money from the trust to a default beneficiary.
In the event of a claim, the life insurance company pays the claim proceeds to the trustees, who at that point choose which of the default and/or potential beneficiaries they will appoint a benefit to, and in what proportion.
If you remember the scene in 'Oliver Twist' where Oliver, holding his bowl out; says to The Beadle “Please Sir, may I have some more?” and if you think of the trustees as playing the part of The Beadle, (deciding whether or not to hand out proceeds) and the beneficiaries as playing the part of Oliver, you may get the general idea.
Unlike Oliver, however; the beneficiaries have no right to ask. The trustees simply decide for themselves which of the beneficiaries receives a benefit, and if so, how much.
For example, if the insured person is survived by their spouse, and assuming the surviving spouse is a potential beneficiary; (which would normally be the case) the trustees can appoint 100% of the benefits to the spouse.
If the trustees apply the proceeds for the benefit of the 'default' beneficiaries, there would normally be no Inheritance Tax liability, as the default beneficiaries are deemed by HM Revenue & Customs to have original ownership of the benefits, and there is therefore no element of 'transfer' and therefore no Inheritance Transfer Tax due.
In order to avoid children having an Inheritance Tax liability on the proceeds, it would usually be the case , providing the surviving spouse is UK domiciled, that children be named as the 'default' beneficiaries; with the spouse being named as a 'potential' beneficiary.
In addition, providing there is a surviving trustee, children will not have to wait for probate to be granted and could receive the funds with minimum delay.
In the event that one parent does survive the other, they can receive the proceeds from the trustees, providing the recipient parent is a potential beneficiary.
If, instead of making an outright appointment of the proceeds to the surviving parent, the trustees were (assuming the trust wording allowed it) to make him or her an interest-free loan; a debt against the surviving parent's estate would be created.
This could result in a further Inheritance Tax saving upon the survivor's ultimate death, as their estate would be reduced by the amount of the loan, which would then be repayable to the original trust.
