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Matthew Hutton MA, CTA (fellow), AIIT, TEP points out some potential uses and practical points arising from 'Immediate Post Death Interest' (IPDI) Trusts. 

Context

In my recently-concluded series of Estate Planning Conferences this Autumn I asked delegates to consider, as the second problem question, why an IPDI structure might be adopted as against an outright gift – especially for a surviving spouse/civil partner.  The following suggestions might prove useful.

Some considerations

The most obvious point is that, while the trustees will typically have power to advance capital (which they may exercise in whole or in part), the beneficiary does not have an unrestricted right to the capital, but merely to such a level of income as is reasonable balancing the interests of income and capital beneficiaries (subject to any letter of wishes asking the trustees to favour income at the expense of capital).  The trustees will also no doubt have power to advance capital, but perhaps also the power to cut down or terminate the right to income. 

1. The most obvious use for an IPDI is in the case of a second (or subsequent) marriage where the first to die wishes the capital to go - after the second death - to the children of the first marriage.  Note the point that, if this is achieved by the trustees terminating the IPDI during the survivor’s lifetime with a view to the PET becoming exempt on survival for seven years but she does not, (so making the gift chargeable), the survivor’s stepchildren will have first call on her nil-rate band at the expense perhaps of her own children by the first marriage.  The point needs to be appreciated and covered perhaps by a discretionary legacy to make adjustments as between the two sets of stepchildren in terms of the burden of IHT. 
2. Another reason for creating an IPDI is when one is making Wills for elderly clients.  If, following the first death, the survivor is no longer in a position to decide on making an absolute gift by way of a PET, it would turn out to be convenient to give the discretion to the trustees by way of termination of an IPDI, no doubt in conjunction with a letter of wishes. 
3. In the context of the transferable nil-rate band, an IPDI structure avoids the risk of the surviving spouse dishing out chattels (and perhaps other property) within two years after the death in pursuance of a letter of wishes, so triggering a chargeable transfer by the deceased, following IHTA 1984 s143.   The trustees of an IPDI can transfer the chattels etc. to the intended individuals, so terminating the IPDI and constituting a PET by the surviving spouse to that extent.
4. With an IPDI it is much easier to control the level of income for purposes of means-tested benefits, and with protection in the context of care home fees.
5. An IPDI might afford protection for the survivor from begging by the children (in appropriate circumstances). 
6. A termination of the IPDI is not expressly treated as a gift for the purposes of FA 1986 s102A-C.  FA 1986 s102ZA (added by FA 2006), deeming a gift with reservation of benefit in the case where an IPDI is terminated and the beneficiary continues to enjoy the ‘no-longer-possessed property’, applies only to the original s102.  HMRC now accept that s102A does not apply to reversionary leases if the entire freehold has been owned for seven years; however, note s102B and problems with a move.  Significantly, s102ZA does not apply if the interest does not come to an end, so one could create an interest pur autre vie.
7. By itself a termination should not result in a POA charge.  A requirement for consent gives rise to POA issues.
8. It does not result in a CGT disposal, provided the property remains within the same settlement.
9. Termination of an IPDI can result in an [IHTA 1984] s71A trust.
10. A CGT point: if with the family home the ‘period of ownership’ rule in TCGA 1992 s222(7) might restrict the main residence relief on a disposal by the survivor, an IPDI would solve the problem.
11. As a practical point, it will be much easier following a death for trustees to pay out cash for any particular purpose (maintenance etc.) than with an absolute gift to have cash ready for release by the executors, which will have to await probate. 
12. However, could an IPDI be vulnerable to challenge under the Inheritance (Provision for Family and Dependants) Act 1975?  Make sure that the survivor has enough to live on.  Perhaps consider an IPDI for the home (and any real property), with an absolute gift of other assets? 

There are two rather curious points to note: 

• Generally, a termination of an IPDI in favour of an s71A trust is a PET, unless it is a disabled interest (since there is no IPDI, as required by s3A(3B)(b)), or there is an assignment (since the interest is not terminated, required by s3A(3B)(c)). 
• While termination can result in an s71D trust, this will not be a PET.

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