Life Assurance Solutions
If you have a life assurance policy, and there is not currently a trust arrangement in place, you could be missing out on one of the most effective financial planning solutions available to you and your family.
A life assurance policy is there to pay out a sum assured, most commonly a lump sum amount, in the event of the death of the life assured, or in the case of joint policy, one of the lives assured.
If this sum is paid out without a trust arrangement it has profound possible implications:
- The sum will be added into your estate and could be assessed for Inheritance Tax (IHT);
- It is paid out to your beneficiaries and the pay-out value is now in their possession; this could mean the sum is a potential target for future third-party claims, for example a divorce or bankruptcy;
- The pay-out could be painfully slow as it will have to go through the process of probate.
Arranging for the pay-out to go into a trust, which comes into effect if, and only if, the sum assured is paid, protects against all these threats.
If you have a trust in place, which is there to receive the lump sum pay-out (i.e. it goes to the trust not your beneficiaries) the first thing to note is that this will bypass the probate process and can be paid very quickly after death.
Once in the trust the sum assured is now available to your trustees to distribute as per your wishes and instructions.
They can then distribute to your beneficiaries in the form of an interest-free loan from the trust to your beneficiaries.
As a loan, this is not an asset in their estate, so it is not subject to IHT, nor is it available for any third party to claim against.
This examines the difference between having a trust added into the arrangement versus not having a trust:
On your death you have a life assurance policy which pays out £200,000, this goes to your spouse to pay off the mortgage. Firstly this pay-out will take some time to process as probate needs to occur before the money is released. Once this has happened, your spouse receives £200,000 and uses this to clear the mortgage; this has now added to the IHT liability and could be then reduced by 40 percent or £80,000 on the spouse’s death. It is also there as an added amount should the spouse remarry and later divorce, being subject to claim against in any divorce proceedings. It is also there for assessment or claim should the spouse have to pay care fees. The life assurance payment has effectively been put ‘in play’ for tax or third-party claims.
Trust in place
This time the £200,000 is paid into the trust; your trustees, one of whom could be your spouse, then pay £200,000 as a loan to your spouse as per your wishes. As a loan this is now ring fenced and does not form part of the estate. It cannot be subject to IHT on the second death and will not be claimable against should he be subject to a third-party claim.
The trust that you can use in these circumstances is called the “Assurance Trust”
There are exceptionally good reasons why putting the trust in place will provide extra security and protection for your family.
- The primary benefit of any trust is to ensure family and bloodline protection, at the same time as ensuring your wealth is directed exactly where you want it to go, even long after your death. This is particularly important in situations which involve future re-marriages.
- Furthermore, for larger estates, trusts can be used to create additional tax planning opportunities and by extension, significant tax savings.
- The Assurance Trust is a discretionary trust which allows your appointed trustees a great deal of flexibility in how the benefits are used.
- Putting such a trust in place is straightforward – you can get the trust in place now ready to receive the benefits should the worst happen.
- The trustees will be guided by your letter of wishes, which although not legally binding will be persuasive. The trustees will always have the power and flexibility to ensure your money goes to your chosen parties in a manner which is both tax efficient and protected.