What is a Potential Beneficiary? (IIP Trust)
Under an interest in possession, power of appointment trust, a 'potential' beneficiary is a person or persons who may be paid money from a trust, at the discretion of the trustees.
Potential Beneficiaries are not beneficial owners of any trust proceeds. (The default beneficiaries are the beneficial owners.)
Therefore, if the trustees decide to pay money from the trust fund to a potential beneficiary, it counts as a transfer away from the default beneficiary or beneficiaries.
If the trustees appoint the policy proceeds to a potential beneficiary or beneficiaries, this will be treated as 'potentially exempt transfer' away from the default beneficiary or beneficiaries, and could give rise to an Inheritance Tax liability if a default beneficiary were to die within seven years.
The exception to this would be in the event of the trustees appointing benefits away from the default beneficiaries to the UK domiciled spouse of the insured person, either during the insured person’s lifetime, or within two years of their death.
For this reason, it would usually be the case that children would be named as default beneficiaries and the settlor's spouse (assuming the spouse is UK domiciled) would be a potential beneficiary.
