The 3 main advantages of writing a life insurance policy in trust
1. Minimise inheritance tax
This is potentially the biggest advantage, as, depending on your circumstances when you die, writing your life insurance policy in trust may save your beneficiaries up to 40% of the policy payout from being lost in inheritance tax.
More than half a billion pounds are being paid each year in inheritance tax (IHT) from life insurance policies because people are not taking them out within tax-efficient trusts.
‘Writing your life insurance policy in trust’, as the process is known, makes it exempt from IHT when you die as it places it outside your estate (see our blog on Inheritance Tax Planning).
Few policyholders use trusts, although the numbers are rising as more and more people realise the benefits, once they are explained by an independent financial advisor.
Financial advice website Unbiased estimates that because of this some £530million will be paid out needlessly in IHT this year on life insurance policies. That is inflated in part by soaring house prices that have seen thousands more households breach the £325,000 IHT threshold on estates (see our blog House Prices To Rise By 30%).
Karen Barrett, of Unbiased, said: ‘Many of us want to pass on our estate to loved ones after we’re gone but what people don’t realise is the sizeable tax bill we might also be handing over in the process.’
2. Avoid the need for a grant of probate
Writing your life policy in trust also means that your beneficiaries are likely to receive the policy payout much sooner – within a few weeks – than if there has not been a trust. This is because the insurance company will only require sight of the death certificate. Otherwise your executors will have to go through the process of applying for a ‘grant of probate’. This will delay the payout for some months, which may make life complicated, given that inheritance tax often has to be paid within 6 months of death.
3. Greater control over your life insurance policy
Writing your life policy in trust guarantees that the payout will go to the people you named. If you haven’t written your life policy in trust and you owe money at the date of your death, your intended beneficiaries may find that the payout is used to pay off your debts rather than coming to them.
2 things to look out for:
Look out for the critical illness element
Many life policies contain critical illness cover, which means that the insurance company will pay out on your policy if you are diagnosed with any defined illnesses (such as cancer) or suffer specific injuries. You need to be careful here, because you are not likely to want to give away the benefit of the critical illness insurance as you may need it to live on. The answer is to use a split trust, so that you keep the benefit of any critical illness payout but hold the death benefit in trust for your named beneficiaries.
Look out for possible tax implications
Writing your policy in trust can offer significant inheritance tax advantages for your beneficiaries on your death but there could be inheritance tax implications, depending on the type of policy you have, the type of trust you want to use; and your state of health when writing the policy in trust. You should take appropriate tax advice before proceeding.
It pays to consult a financial planning expert like Marchwood IFA to arrange necessary life insurance and also to write it in trust to benefit from the advantages listed above. For further advice on trusts and inheritance tax planning, please contact Richard.Smith@marchwoodifa.co.uk