Gift into Trust using Endowment Policies

All too often clients like the idea of mitigating a possible inheritance tax liability but don’t want to hand over their cash in case they need it in the future. Whilst this is an understandable position it does create as issue when trying to assist these clients.


An option is to set up a series of surrenderable single premium endowment policies. The client assigns the policies to a Bare Trust for their own benefit. The policy terms state that the legal title can only be assigned once therefore the client cannot call for the return of the legal title. The client then irrevocably assigns all beneficial interest in each policy to the trustees of a second settlement which is in a discretionary form.


The equitable rights assigned include:


  • A death benefit
  • A maturity benefit
  • A right to surrender the rights under each policy, at any time
  • A right to extend the term of any policy (more than once if required)


The Discretionary settlement comes into effect on the day after the Bare trust is established. It confers a series of Discretionary sub-trusts, one for each policy. The beneficial interests in each policy are held within the corresponding sub-trust. The trust period for each sub-trust terminates on the earlier of the maturity of the corresponding policy and the statutory perpetuity period. The client is expressly prohibited from each of the sub-trusts.


If the trust period of a sub-trust terminates due to the maturity of the corresponding policy the client becomes absolutely entitled to the property. So the client has a reversionary interest in each sub-trust and that reversionary interest is limited to maturity benefit of each policy. Therefore, the client is able to receive capital when a policy matures, thereby giving them access to some money if required.


If the maturity value is not required the trustees can extend the maturity date of each policy. Because the option is exercised by the trustees, any extension is not treated as a new gift from the settlor.


During the settlor’s lifetime, the trustees also have the option to surrender and pay the cash to one or more beneficiaries or to assign policies out of the trust to any beneficiary in specie. Because the policies are surrenderable it should be possible for the recipient to realise capital before the date of the settlor’s death, which may be attractive to certain clients.

If you would like to discuss this or any other financial matter please do not hesitate to contact the office
0845 680 8910.

Savvy Financial Planning, Hinton Business Park, Tarrant Hinton, Blandford Forum, Dorset, DT11 8JF