Lifetime transfers: gifts with reservation (GWRs): insurance policies: the property given
The following examples illustrate the normal gift with reservation (GWR) property considerations (IHTM14313) in their application to policies - the need to identify precisely the property disposed of by way of gift.
Noah effects an endowment policy which provides for the payment of the sum assured after ten years (the maturity date) or on his earlier death. The policy is effected in trust for the benefit of his children if living at the death of the life assured before the maturity date, but otherwise for the life assured.
This is not a GWR. Noah has merely given away one interest in the policy (the death benefit) and retained the other (the maturity benefit).
Jacob effects a whole life policy on his own life in trust for such of his children as are living at his death. In the event of there being no children who survive him the policy proceeds will revert to his estate under a resulting trust.
This is not a GWR. The retained interest in the policy was not part of the gifted property.
Mary effects a whole life policy on discretionary trusts. The trustees have a power of appointment over the trust fund which is exercisable in favour of a number of people including the transferor.
This is a GWR. The entire policy has been given away but is not enjoyed to the entire exclusion of Mary because of the power of appointment which can be exercised in her favour. The position would be the same even if the trusts conferred an immediate interest in possession on some beneficiaries.
Joseph effects a whole life policy which provides for the payment of a Total Disability Benefit (in lieu of the death benefit) in the event of him becoming permanently disabled before reaching his 60th birthday. He places the whole of the policy, except the right to receive the Total Disability Benefit which he retains, in trust for his granddaughter (absolutely).
This is not a GWR. The right to receive the Total Disability Benefit was not part of the gifted property, it remained an asset of the donor’s estate.
An insurance policy is written in trust. One share of the policy is held for the benefit of Isaiah under a bare trust and the other for beneficiaries who do not include Isaiah.
If the trust is severable, the part from which Isaiah is entirely excluded is not regarded as property subject to a reservation. This would still be the position even if Isaiah had power to make transfers from his share to the beneficiaries’ share (but not vice versa).
You must take care however, to ensure that the special rule for linked benefits (IHTM14452) does not apply.