Trusts & Life Insurance
Should My Life Insurance Policy be in Trust?
When applying for Life Insurance from this website we urge you to explore the options regarding trusts prior to accepting your policy. Lifebroker cannot give advice however these are the facts as we know them.
You can hold your life insurance in a few ways:
Own Life: On death the value of the policy is added to your estate and inheritance tax may be payable at 40%.
Life of Another: This just means that your partner can insure you and they are the owner of the life insurance policy.
Holding your life insurance policy in trust means that:
Funds are paid quickly as the beneficiaries do not need to wait for probate.
Offers protection against creditors of your estate.
If the funds are paid to named individuals, this should avoid Inheritance Tax.
Possible disadvantages to putting life assurance plans in trust are:
Once you have decided who the beneficiaries are to be, changing them may not be an easy process.
Even after you have stated who the beneficiaries of the plan are to be, your executors will have little or no control over the payment of benefits from the plan, even if after your death, in hindsight it would have been better to have paid the proceeds of the plan out to someone else, the executors may not be able to do so.
Possible disadvantages of setting up a plan on a 'life of another basis' are:
A third party such as a partner or spouse owns the plan. If in the future your relationship with that third party breaks down, the plan may no longer be appropriate and may have to be replaced at a significantly increased cost, (assuming there have been no changes to your health that may make it more difficult to get the cover you are looking for) or you may have to try to get the plan assigned back to yourself which may not be easy to do.
For this to be allowed, an 'insurable interest' must exist. Instead of you being the owner of the plan, another individual (such as a spouse or partner that can prove an insurable interest), is the owner of the plan and on death the proceeds are paid directly to that individual. Once again, as the other individual is the owner of the plan, the proceeds do not form part of the deceased's estate for inheritance tax purposes.
Inheritance Tax is the amount of tax that could be payable on someone's estate worth over a specified amount when they die. You may think that you can pay the Inheritance Tax out of the funds that are left to you in the Estate. If you think that this is the case - you are wrong. The Inheritance Tax payment has to be made before the funds can be released from the beneficiaries estate.
Inheritance Tax - payable before the estate moneys can be released
Your loved ones can't claim what's due to them under your will, and then pay the Inheritance Tax. They must pay Inheritance Tax first, before the value of the estate is released to them.
Life Insurance - a tax free way to pay Inheritance Tax
That's why many people take out a life insurance policy which will pay out on their death and so cover the cost of any Inheritance Tax due on their estate. The plan should be set up under a trust, so that it does not form part of the deceased's estate for inheritance tax purposes. What's more, the proceeds of the policy are paid free of tax.
For IHT planning, (all life policies should be written in trust to avoid the life policy proceeds exacerbating the size of your estate). In the case of a married couple, a whole life insurance policy is taken out in joint names and payable only after the last person has died. In the case of a single person, a whole life insurance policy is taken out in their name alone. The insurance plan is set up as a trust, with the beneficiaries usually being the children and other family members of the deceased.
Gift Inter Vivos Insurance Policy - Protecting Lifetime Gifts
People can reduce or eliminate their Inheritance Tax liability by reducing the value of their estate during their lifetime. Usually this is done by making gifts to family members (potentially exempt transfer or PETs) - PETs are tax-free as long as the donor survives for seven years after making the gift.
There is a risk that the donor may die within the seven-year period, so the donor will often take out a life insurance policy to cover the cost of the tax payable, should they die within that period. The type of insurance is known as a gift inter vivos policy and runs for seven years. The policy is set up in trust to ensure that the funds fall outside the donor's estate for tax purposes. The beneficiaries are normally the heirs to the estate.
Whole of Life Insurance Policy - Insurance for the whole of your life
Whole of Life Insurance always pays out, it is guaranteed that the policy will pay out upon your death. There are not many insurance companies that offer this sort of cover as most insurance companies sell term life insurance.
As the name suggests, 'Whole of Life insurance' provides life insurance cover for the whole of your life. The sum insured is paid to your dependents following your death.
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