How is the terminal illness benefit treated within the trust?
Terminal illness is treated as a gifted benefit in the same way that any benefit payable on death is. There are some trusts that allow terminal illness benefit to be retained but this would mean that the whole benefit, or at least any amount they have not spent, would be in their estate when they die in the next 12 months. They cannot simply choose not to make a claim, as HMRC would regard this as an omission to exercise a right and would tax the benefit anyway. It is therefore more sensible to have this as a gifted benefit so that the settlor has the time to organise their affairs and give instructions to the trustees as to what they want to happen to the money without it inflating their estate. It is also possible for the trustees to use some of the money for the benefit of their family while the settlor is still alive which is after all what they put the cover in place for originally, whereas if it was a retained benefit it could only be used for the benefit of the settlor themselve
