CII R05 Trusts for Life Assurance 2

Question 1

What is the '14-year rule' that is relevant when a life policy is placed in trust?

Accepted Answer

A gift of a policy into a discretionary trust may be subject to IHT lookback over the previous 14 years for cumulation purposes

Answer

When calculating IHT on a chargeable lifetime transfer (such as placing a policy into a discretionary trust), the previous 14 years of transfers are cumulated against the nil-rate band when working out the tax charge.

Question 2

A married couple take out a joint life second death policy. What type of trust would be most appropriate?

Accepted Answer

Split trust

Answer

A split trust (also called a flexible trust with split provisions) is ideal for joint life second death policies, as it allows the survivor's rights to be separated from those of the beneficiaries, ensuring the survivor can still access policy benefits during their lifetime.

Question 3

Which of the following is a potential disadvantage of placing a life assurance policy into a discretionary trust?

Accepted Answer

The settlor loses control over the distribution of the proceeds

Answer

Once a policy is placed into a discretionary trust, the settlor loses direct control over how the proceeds are distributed — the trustees have this discretion. This may be a concern if relationships with trustees break down.

Question 4

What is a 'letter of wishes' in the context of a life assurance discretionary trust?

Accepted Answer

A non-binding document from the settlor expressing their preferences to the trustees

Answer

A letter of wishes is a non-binding document that expresses the settlor's preferences regarding trust distribution. Trustees are not legally obliged to follow it but will usually take it into account when exercising their discretion.

Question 5

A policyholder places a whole of life policy into a discretionary trust. The policy has a surrender value of £400,000. What is the potential IHT implication?

Accepted Answer

The transfer may be a chargeable lifetime transfer, with an immediate 20% IHT charge on the value above the nil-rate band

Answer

Placing a policy with a significant surrender value into a discretionary trust is a chargeable lifetime transfer for IHT purposes. If the value exceeds the available nil-rate band (£325,000), an immediate IHT charge of 20% applies.

CII R05 Practice Test

CII R05 Practice Test

CII R05 Trusts for Life Assurance 2