Learning about Flexible Reversionary Trusts
A flexible reversionary trust (FRT) enables a settlor to give money away, with the option to take some or all of it back on specified dates. FRTs are most likely to be tested in R06, J02, AF1 or AF5.
Establishing the trust
FRTs are available on a single settlor basis only.
The process starts with the settlor investing in a series of single premium endowment policies and can have multiple lives assured.
Each endowment has a maturity date. This will be on a policy anniversary date. The maturity dates will be determined at outset and will usually be spread over 10 years. As each policy matures its value can either be paid to the settlor or, if the settlor does not require the funds, the trustees can extend the maturity date so the policy does not pay out until a later date. You should note that the settlor only has the right to the maturity value at the maturity date. All other benefits are held in trust for the beneficiaries.
The trustees can surrender any of the policies at any time and pay the proceeds to any of the beneficiaries, even if the settlor is still alive. Alternatively, they may assign policies to the beneficiaries whenever they see fit.
Single or double trust?
Either a single or a double trust can be used:
- If a single trust is used, the settlor simply assigns the policies into a discretionary trust.
- Where a double trust is used, the settlor assigns the policies into a bare trust for their own benefit and then irrevocably assigns the beneficial interest of each policy into a discretionary trust.
Points to note tax-wise include:
- The initial investment is a chargeable lifetime transfer (CLT) so there is the potential for an initial charge and periodic or exit charges if the amount in the trust exceeds the settlor’s cumulative nil rate band.
- The amount gifted will be outside of the donor’s estate after 7 years.
- Any growth will be outside the estate immediately.
- There will, however, be an income tax charge on any chargeable gain at maturity or surrender.
In addition, there is no discount for inheritance tax (IHT) purposes, no gift with reservation and no possibility of a POAT charge.
FRTs are increasingly popular as an alternative to discounted gift trusts or loan trusts. As such, we can probably expect to see them appear in CII exams on a more regular basis.
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