Interest in Possession, Power of Appointment Trust (IIP Trust)
Prior to 22 March 2006, the trust best suited to be used with a life insurance policy was, in our opinion, what is known as an ' Interest in Possession, Power of Appointment Trust' (IIP Trust).
An IIP Trust enables the trustees to choose which of the beneficiaries will receive money, depending on the circumstances. Due to this flexibility, an IIP Trust is often referred to as a 'flexible trust'.
The trustees do not have to pay money from the trust to a particular beneficiary, regardless of whether that beneficiary is a default beneficiary or a potential beneficiary. They have the power to appoint money from the trust to any of the beneficiaries.
If the trustees appoint money to a potential beneficiary, it is classed as a potentially exempt transfer from the default beneficiary or beneficiaries.
However, if this transfer takes place during the settlor's lifetime, or within two years after the settlor's death, and providing the money goes to the legally-married, UK domiciled spouse of the settlor, under the spouse exemption, this transfer will be totally exempt for any liability to Inheritance Tax.
While not binding on them, the settlor may choose to leave a letter of wishes with the trustees, expressing his or her preference as to which of the beneficiaries, depending on the circumstances, (e.g.. if the settlor's spouse should survive or not survive) the trustees should lend or give money to.