Pension and death benefit trust

A bypass trust can be created during your lifetime to pay death benefits to potential beneficences such as your surviving spouse and family on your death.

A bypass trust is created to deliver:

  • A pension lump sum death benefit on the death of the pension scheme member
  • The proceeds of a life insurance policy on the death of the life assured

Death benefits from most pension schemes (and from some life insurance policies) do not form part of your estate as they are held by the pension scheme trustees. If you have not told them otherwise, the pension trustees will usually pay the death benefits to your spouse (or other beneficiaries) outright. While this seems attractive, it has the effect of putting a lump sum of cash into the hands of your beneficiaries that can then be assessable for the payment of long term care fees and inheritance tax.

Long term care and inheritance tax

If you set up a bypass trust any death benefits will be held in trust and will not be owned by your spouse (or other beneficiaries). Consequently, if your spouse requires long term care then the death benefits will not be assessed as part of any means test. Should your spouse die the death benefits will not form part of their estate for the assessment of inheritance tax.

In simple terms the asset will bypass the estate of the surviving spouse/partner.

The trust can help to ‘ring fence’ part of your assets from assessment for long term care while, at the same time, protect it from being liable for inheritance tax.

In most cases the creation of a bypass trust cannot be done under your Will because the death benefits are not yours to give away as they are owned by pension trustees. A bypass trust therefore could be the only way to protect the assets.

The trust can be drafted with sufficient powers so that monies in the trust can be lent to your spouse or partner, giving them all the advantages of outright ownership but nevertheless not ‘owning’ the assets.

Why choose Linder Myers?

We have a dedicated team of lawyers specialising in drafting bypass trusts. When creating a bypass trust care needs to be taken and your overall circumstances should be considered. It is vital that specialist legal advice is obtained to ensure that you receive the correct advice and the correct action is taken.