Protect your Family through IHT
Protect Your Family
Put simply – if you have life assurance policies you should ensure they are set up or written under trust. It is, as they say, a classic no brainer.
The good news is, if you already have a policy or policies in place you can arrange for an existing policy to be placed under trust; you do not need to start afresh.
The no brainer aspect of this is straightforward: there is no downside but potentially significant benefit.
One of the benefits that is often overlooked is that a trust mechanism allows for a life assurance payment, should death occur, to be paid immediately and without any complication of waiting for probate.
There are often very good reasons why a life assurance payment is required by beneficiaries quickly e.g. to pay for a funeral. A life assurance policy pay out can be made via the trust without any delay.
An immediate pay-out
Probate can be complicated and can take some time to deal with and sort; if the policy is not written under trust then the payment will be added into the deceased’s estate and will not be released until probate is granted. The time this takes may vary considerably and will be dependent on whether there is a will in place, whether Inheritance Tax has to be paid and there can be other factors which may slow the process down; a reasonable case can take around 4 weeks, but even with relatively minor complicated cases this can be a few months, in a complex or extreme case this can even stretch into years.
A trust will avoid this and putting a trust in place for existing policies is normally easy and quick; likewise if you are taking out a new policy this will be a straightforward addition to the application process.
Ensuring payments go exactly where you want
When you put the policy under a trust you will dictate who you want the beneficiaries to be; for example if you have four children you may make them each a 25% beneficiary. This means there is a precision in how you arrange for the monies to be paid, to whom and when.
• You may want to restrict how the beneficiaries use the money!
• You may not want them to receive the funds before the age of 25.
• You may want them to use the money for debt reduction only and not for lifestyle spending.
This may otherwise be dealt with by a will and have the same effect, however the trust mechanism acts as a further layer of direction and can be a good protection against unforeseen circumstances, such as a divorce or bankruptcy of a beneficiary.
Protecting against Inheritance Tax.
The other major benefit is protecting against Inheritance Tax (IHT); the life assurance benefit on pay-out – if unprotected – is liable to IHT. This is clearly an unnecessary and wasteful position: why pay a life assurance premium to see some of the future benefit taken away in tax? The life assurance benefit is there for your beneficiaries not for the government.
However, many people have life assurance cover which will fall into a taxable estate. Placing the policy under trust makes the pay-out IHT tax free.
Remember IHT rates could change in the future; it is wrong simply to assume that today’s rates will remain as they are, so even if there is an estimate that today’s life cover is not sufficient to push an estate above the IHT free allowances; this could change.
If we look at an example we may see how the position is easily dealt with:
Dr Penguin has a property valued at £650,000, investments of £500,000 and a life assurance policy with a death benefit of £650,000. He is a widower, his wife having died a few years earlier. He has four children. Currently his life assurance is NOT written in trust.
If he were to die at this juncture the IHT bill on his Estate would be £400,000.
However, if he places the life policy into trust the IHT bill would be £200,000, providing an additional £50,000 for each of his children (assuming he left his estate to each of them equally).
Variations on this position exist with families and individuals up and down the country.
As you can, this is a particularly complicated issue and is not one to be considered without seeking advice first.