Immediate post-death interest (IPDI) trusts have become increasingly popular with spouses and civil partners, as well as cohabitees – particularly where one (or both) are in subsequent relationships or marriages.

They are also invaluable in protecting assets from potential liability for care home fees and ensuring that assets are preserved for the benefit of children of the first marriage in the event of a second marriage or formation of a civil partnership.

The initial drafting requires careful thought as there are a number of decisions that have to be made. Then, once the trust has come into effect on death, the trustees, who are often family members without legal knowledge will need clear advice on exercising their powers and responsibilities under the trust.

What is an IPDI trust?

By way of reminder, an IPDI trust is an interest in possession trust created by will or deed of variation (s49A the Inheritance Tax Act 1984which takes effect without an intervening interest, i.e. it must be ‘immediate’. An ‘interest in possession’ is not defined by statute, though the House of Lords in Pearson and others v IRC defined it as a ‘present right to present enjoyment’ of income or assets. Such an interest is usually given for life but can be for a shorter period. In the case of a life interest trustees are often given a power to terminate it early but this does not prevent the interest being an IPDI unless and until they exercise the power.

The inclusion of a survivorship clause in the Will does not prevent the interest being treated as ‘immediate’: under s92 IHTA 1984, the interest taking effect at the end of the survivorship period is to be treated as though it had taken effect immediately on the testator’s death.

The IPDI beneficiary is treated for inheritance tax (IHT)purposes as the beneficial owner of the trust property. One of the attractions of an IPDI trust is that where the life tenant is the surviving spouse or civil partner of the testator, the s18 IHTA 1984 spouse exemption applies. There are no anniversary or exit charges while the IPDI exists. However, on the termination of the IPDI the beneficiary is treated as making a transfer of value of the trust capital which can give rise to a substantial IHT bill. The trustees are liable for the tax, but the nil rate band of the IPDI beneficiary will be reduced by the transfer. This can mean that beneficiaries of the IPDI beneficiary’s free estate are adversely affected.

Trustee powers and duties

Lay trustees will need advice on their powers and duties. For a recent example of the problems that can arise from not understanding them, see Batt v Boswell

If the trust is in existence two years after the death of the testator, it will have to be registered on the trust register. Since the implementation of the Fifth Money Laundering Directive, trusts without a tax liability have to be registered (unless excluded by schedule 3A of the Money Laundering Regulations 2017) as well as those with a tax liability. This means a huge number of small family life interest trusts have become liable for registration.

Often the trust assets consist of a residence or half share in a residence in which case the trustees will have to consider who is responsible for maintenance, repairs and insurance. A well drafted trust will make provision for this but there are often problems.

If the assets include cash and/or investments, the trustees will need to consider a suitable investment policy. Unless the Will provides otherwise, they need to balance the interests of the life tenant and remainderman. The Will may give the trustees power to apply capital for the benefit of the life tenant. How should they exercise that power? Does the Will contain any directions? Is there a letter of wishes? What if, as is often the case, the trustees include beneficiaries -to what extent do the self-dealing rules apply?

Are the remainder beneficiaries clearly defined? They may be but clauses are not always easy for lay trustees to understand. Sadly, it is not unknown for errors in drafting to occur with the result that there is no effective gift of the remainder interest.

Taxation

If there are income-producing assets, the trustees will need to advice on their liability for income tax and the possibility of directing that income is to be paid directly to the beneficiary (greatly reducing the administrative burden). They will also need advice on their liability to capital gains tax and possible exemptions. If the IPDI can be terminated during the life tenant’s lifetime, trustees need advice on the IHT consequences for themselves and the IPDI beneficiary There are particular challenges around taxation when the trust ends, for which the trustees will need careful specialist advice. For example, the application of the residential nil rate band (RNRB) on death, spousal exemptions, holdover relief, tax and capital gains tax liabilities.

These challenges are discussed in our Wills and Probate webinar with Professor Lesley King. Available individually and as part of our LAW2024 Online Wills and Probate Autumn event.