If you're considering taking out a life insurance policy, your loved ones are more likely to benefit from it if it's 'written in trust'. Find out what putting life insurance in trust means for your beneficiaries.
If you're considering taking out a life insurance policy, your loved ones are more likely to benefit from it if it is 'written in trust'.
You may only be thinking about covering the mortgage and other debts you don't want your family to have to pay in the event of your death, but a life insurance in trust can also ensure that they get more of your money — instead of it going to the taxman as part of your inheritance tax bill.
Life insurance isn't usually subject to any tax, but depending on how much your 'estate' is valued upon your death, that life insurance pay out could be subjected to a large inheritance tax bill instead of it being received in full by your loved ones.
Your estate is the value of everything you own, including legal rights, interests and entitlements to any assets. And if you're single or divorced, the threshold for having your estate subject to inheritance tax is £325,000.
This amount and below is free to be passed on to your beneficiaries (the family, friends and anyone else who you will inherit something from your estate) without tax. Any amount above this limit will be subjected to a 40% tax. So for example, when you die, if your estate was valued at £600,000, your inheritance tax bill would be £108,000, which is 40% of the £175,000 above the £325,000.
This means money would have to come out of your estate to pay the tax bill or your beneficiaries would need to pay it in order to receive what you have left for them.
If you're married or widowed, the inheritance tax threshold stands at £650,000, and the same rules apply: anything above this threshold is subject to a 40% tax bill. This figure is double because you are allowed to exchange your assets to your partner tax free.
If your estate is valued higher than the tax inheritance threshold, your life insurance pay out will form part of your estate and thus be subjected to the 40% inheritance tax.
This can be a headache for the family you leave behind. They might end up having to use the remainder of your life insurance pay out to pay off some of the inheritance tax bill, rather than the mortgage, or any other debts that it was intended to pay off in the first place.
Writing your life insurance in trust means that even if your estate is subject to inheritance tax, you can leave behind some money that is just for your loved ones, or even to pay off your entire inheritance tax bill.
Surprisingly, the vast majority of life insurance policy holders don't have theirs put in trust, despite the obvious benefits. It may not always be for everyone, and may not apply to those whose estate is valued below £325,000. But most the time it's a decent piece of forward planning that could save your loved ones thousands of pounds. So just how does it work exactly?
Putting your life insurance policy in trust involves a legal arrangement that helps to ensure that the money from that policy is used exactly as you intended, regardless of the value of your estate. If you don't have a trust, then the money will be used to pay off any debts you have left outstanding upon your death.
Even if you have not written a will, a life insurance policy in trust will still apply, i.e. will not need probate to be granted (this is jargon for a legal process which confirms if someone is authorised to deal with your possessions - it can still apply if a will has been written, but can take much longer if not).
With a life insurance policy in trust you can specify who receives the money and how much they get. It also means that your beneficiaries will receive the money much quicker, whether a will has been written or not.
Often getting access to money and assets from your will can take much longer, but with a life insurance policy in trust, the money can sometimes reach your loved ones within a couple of weeks of the death certificate being produced. If the policy is not written in trust it can sometimes take several months for your beneficiaries to receive the money, if it hasn't already been spent on repaying debts.
Remember, the payments from a life insurance policy written in trust are outside of your estate, meaning they are not subject to tax. So if you know your family are going to be faced with an inheritance tax bill after your death, you could even use the life insurance money to pay off your tax bill. This would mean that the rest of your assets were free to be distributed to your chosen beneficiaries without them having to pay any inheritance tax on it.
Remember, there will be a lot of legal jargon surrounding life insurance policies written in trust. In order for policy to be written in trust, you will be asked to assign a trustee or trustees to manage the assets from your life insurance policy.
This essentially means that someone (or people) you trust will be given the responsibility of ensuring that the life insurance money is paid out exactly as you intended to the right beneficiaries. This is what negates the need for probate to be granted, even if a will has been written.
Writing a life insurance policy in trust doesn't usually cost extra either. You may want to get additional tax and legal advice before doing so, but if you're happy to go ahead with it you can ask your life insurance provider to write the policy in trust when taking it out. You can also transfer some existing life insurance policies into trust, but in these cases you should probably speak to an independent legal advisor first.
Finally, and perhaps most importantly to note: once a life insurance policy has been set up in trust, it can't be cancelled. This is because control has been given to your trustee or trustees. As a result, you can't make any changes to the pay out terms. So it's important that when you write your life insurance policy in trust that you are absolutely certain about whom the money is for.
If you have any doubts or are overwhelmed by the enormity of the decision - especially because it’s one you can't go back on - then certainly speak to an independent advisor to get the necessary tax and legal advice first.