Pension death benefit trust

A Spousal Bypass Trust is created to receive either:

• 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

A Spousal Bypass Trust is created during your lifetime but will only receive the death benefit on your death. The trust will hold the funds for the benefit of potential beneficiates such as your surviving spouse and family.

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 outright.

While this would seem attractive, it has the effect of putting a lump sum of cash into the hands of your spouse that can then be assessable for the payment of long term care fees and inheritance tax.

The death benefits will be held in trust and will not be owned by your spouse. 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 this cannot be done under your Will because the death benefits are not yours to give away because they are owned by pension trustees – a Spousal Bypass Trust will 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.