Where an offshore investment bond is not in trust and is owned by a UK resident individual, following the death of that individual the life company would need to deal with the executors of the estate.
However, as the offshore investment bond will be issued by a non-UK life company and will be held in a separate legal jurisdiction, the asset forms part of the deceased’s estate in the offshore jurisdiction.
As such, probate needs to be obtained in that jurisdiction in addition to UK probate for the rest of their estate, to enable the executors to deal with the bond. This can be costly, take a while to obtain, and is quite unnecessary as most life companies offer a version of a probate trust to avoid this requirement, often with no cost.
What is probate?
When a person dies, someone has to deal with their ‘estate’ (that is, money, property and possessions) by collecting all the assets, paying any debts and distributing the estate to those people entitled to it.
The estate belongs to the people named in the deceased’s Will. If the deceased did not leave a Will, it belongs to the widow or widower or relations, in accordance with the rules of intestacy laid down by law.
Obtaining probate
The deceased person may, by their Will, have appointed someone to deal with the estate, who is called an ‘executor’. If they have not appointed an executor, or if the executor cannot or will not act, the High Court (or the local District Probate Registry) may appoint an ‘administrator’ to deal with the estate.
If the deceased person has not made a Will, and has died ‘intestate’, then the Court may also appoint an administrator.
The executor appointed by the Will may be confirmed in his position by the Court: the document by which the Court does so is called a ‘grant of probate’ of the Will. The document by which the Court appoints an administrator is called a ‘grant of letters of administration’. Each document is called a ‘grant of representation’.
Sometimes the term ‘probate’ is used loosely to refer to either kind of grant of representation. The Court itself does not insist that a grant be made.
Why is a grant necessary?
Organisations holding money belonging to the estate, for example, banks, building societies and life offices, need to know that the people to whom they pay the money are really entitled to have it.
If they pay the wrong people, they may have to pay the money all over again to the correct people.
A grant is proof that the people named in it are entitled to receive the money and then distribute it to the people who inherit the estate.
Is there any way to avoid the need for a grant?
It is possible to create a trust so that the asset is ‘owned’ by the trustees, and the life company will have trustees with whom it can deal, following the death of the original investor.
Ownership of trust
What is a trust?
A trust is a way of arranging property for the benefit of people without giving them full control over it.
The essence of the arrangement is that the trustees have the legal ownership of the property but cannot use it as their own personal property. Rather, they have to use it for the benefit of the beneficiaries.
In every trust there is, therefore, this partition of ownership. The trustees will be the legal owners and would, for example, be entitled to claim against the life office if the trust property included a life policy.
The beneficiaries have the equitable or beneficial ownership, which means that, although they cannot claim against the life office, they can claim against the trustees in accordance with the terms of the trust. It is possible for the same person to be a trustee and beneficiary.
Ensuring certainty
To create a trust, three certainties must be present:
- Certainty of intention;
- Certainty of objects, i.e. beneficiaries;
- Certainty of subject matter, for example, the property to be transferred.
The majority of trusts are created by the property owner executing a deed and assigning the property to the trustees.
What trusts are available?
One of the simplest offshore trusts is the probate or succession trust. This is an arrangement designed to give an investor (or settlor) control over the future distribution of the trust assets.
The succession trust has the added advantage of there being no need to obtain probate when the settlor dies and the settlor is not the sole trustee, because the legal ownership of trust property is transferred to the trustees when the trust is established.
What this means is that policy proceeds can be distributed quickly and efficiently to the beneficiaries in accordance with the settlor’s wishes.
When the trust is established, the settlor is usually appointed as the sole lifetime beneficiary and as a result can benefit from the trust’s capital if required.
As the trust assets still comprise part of the settlor’s estate, using a succession trust is neutral in relation to inheritance tax (IHT). Establishing your client’s offshore bond within a succession trust is simple and the benefits are easily identifiable; the need for probate is removed and the settlor is able to nominate individuals they would like to benefit from the policy after death.
| Jurisdiction | Example Fees |
| Isle of Man | Exceeds £70,000 but not £140,000 – £300 Exceeds £140,000 but not £200,000 – £501 Exceeds £200,000 – £649 |
| Dublin | Net value of estate does not exceed €1m – €942 For every €31,250 or fraction thereof a further fee of €24 |
| Jersey | Not exceeding £10,000 – nil Not exceeding £100,000 – £50 for each £10,000 or part of £10,000 Above £100,000 – £500 in respect of the first £100,000, plus £75 for each additional £10,000 or part thereof |
| Guernsey | The Ecclesiastical Court fees are approximately £35 per £10,000 of the gross value of the personal estate, plus small additional charges for ancillary documents and for each page of any will or codicil. For estates with a gross value of £80,000 or less, the percentage charge is lower. |
An absolute option
What is a bare probate trust?
Alternatively, some life companies offer a bare probate trust. The purpose of this is to transfer the policy into a trust where the donor is the absolute beneficiary.
As absolute beneficiary, the donor is entitled to receive all future benefits from the policy including withdrawals or partial surrenders.
By using this trust, the transfer of the policy into the trust will be a gift with reservation. So, at all times, the full value of the policy will be inside the donor’s estate and will be potentially subject to IHT on death.
To pay a death claim the life company will not need to see a grant of representation because they can pay the surviving trustees as legal owners.
Course of action
Once the trustees have received the policy proceeds, they have to decide on their next course of action, as the beneficiaries of the trust now become the people who are the beneficiaries of the donor’s estate.
The trustees may decide to reinvest the proceeds until a grant has been issued. They could distribute the proceeds to the beneficiaries of the estate, or make a loan to them, but that may be inadvisable (before a grant is issued) unless they are also the proven beneficiaries of the estate.
The trust is for the absolute benefit of the donor. This means that once the trust has been established, the trustees cannot change the beneficiary.
The beneficiary (donor) can demand their share of the trust fund at any time. This includes being able to ask the trustees to assign the policy to them.
What are the practical effects of putting the policy in a probate bare trust?
The client assigns the policy to the trustees. They are therefore, the donor of the trust. The trustees that they appoint to act with them become the legal owners of the policy together with you, as you are usually automatically a trustee.
The life company will require the signatures of all trustees for transactions relating to the policy. To protect you and the life company from financial crime, the life company may need to verify the identity and address of all owners, including newly appointed trustees.
Every offshore bond should be in trust
It has been said that every offshore bond should be in trust, either because the client is doing estate planning or to avoid the unnecessary additional cost and administration of obtaining a non-UK probate. And
as can be seen from the table above, the cost is not insignificant.
