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There are two approaches to identifying the amount of the retained portion. It can either be a specified monetary amount or a specified percentage of the fund. The different approaches affect how the value of the retained fund is calculated after any withdrawals are taken and therefore the value of the retained fund on death. Where a retained percentage is used, the settlor鈥檚 fund can increase as the value of the underlying bond increases, whereas with a fixed monetary amount all of the increase in value of the bond accrues to the beneficiaries鈥� fund.

Example of a retained monetary amount

Alicia transfers 拢250,000 into a split trust arrangement. She sets her retained portion at 拢100,000 and therefore makes a transfer of value of 拢150,000 (the difference between the 拢250,000 invested and the 拢100,000 retained portion).

Alicia receives a withdrawal payment of 拢12,500 at the end of the first year. Alicia鈥檚 retained fund is now 拢87,500 (the original 拢100,000 less the 拢12,500 received).

Alicia receives two further payments of 拢12,500 in subsequent years and then dies. On her death Alicia鈥檚 retained fund is valued at 拢62,500 (the original 拢100,000 less three payments of 拢12,500). This 拢62,500 retained fund is part of Alicia鈥檚 estate for inheritance tax purposes.

If Alicia does not take any withdrawals in her lifetime her interest will remain at 拢100,000. This is different if the retained portion is expressed as a percentage of the fund.

Example of a retained percentage

Darius transfers 拢500,000 into a split trust arrangement. He sets his retained percentage at 50%. He therefore makes a transfer of value of 拢250,000 at that time.

Each time Darius take a withdrawal from the fund, this reduces his retained interest. The calculation of this reduction can be quite complicated but this will be done by the insurance company, for example:

Darius takes a withdrawal of 拢10,000 at a time when the fund has increased from 拢500,000 to 拢510,000. Darius鈥檚 interest in the fund before he takes the withdrawal is 50% of 拢510,000, or 拢255,000. Once Darius withdraws 拢10,000, the total fund is now worth 拢500,000. Darius鈥檚 interest in the fund is now 拢245,000 (his interest at the time of withdrawal of 拢255,000, less the withdrawal of 拢10,000) out of 拢500,000, or 49%.

Darius dies 9 years after setting up the arrangement. At that time the bond is valued at 拢650,000 and Darius鈥檚 interest is 32.5%. The value of Darius鈥檚 retained fund at his date of death is 拢211,250.

If Darius had taken no withdrawals in his lifetime his retained interest would have remained at 50% at his date of death. If the bond was worth 拢650,000 at the date of death the value of Darius鈥檚 retained fund would be 拢325,000.