Life Insurance & Trusts

Why You Should Put Your Life Insurance in Trust?

Most providers of life insurance do not place policies in trust. This is unacceptable and serves as a poor reflection on the financial industry as a whole.

What Does It Mean to Write a Life Insurance Policy in Trust?

If a life insurance policy is written in trust, the assurance company pays policy benefits directly to named beneficiaries when a claim is made. Policy proceeds will never become part of your legal estate and will not be subject to inheritance tax. It is easy to miss the significance of this so allow us to provide an example.

Example 1: Life Insurance Policy Not Written in Trust

Mary Jones is a widow and would like to leave everything to her son and daughter equally. Mary owns her home, which has a current value of £250,000 and an outstanding mortgage of £20,000. Her investments have total value of £55,000 and her car and other assets have a £20,000 total value.

Mary owns a £125,000 life insurance policy that is not written in trust. Estimated costs for administering her estate and securing probate would be £6,000.

If Mary dies today, her estate would have a value of £424,000 minus inheritance tax. For 2012-2013, the levy for inheritance tax is currently 40 percent of the value of the estate that exceeds £325,000. This means that the taxman will receive £39,600 and each child will receive £192,200.

Example 2: Life Insurance Policy Written in Trust

For this example, we will assume the same figures and a life insurance policy written in trust naming Mary’s son and daughter equal beneficiaries. In this situation, the life insurance company will pay out directly to the children so each one will receive a benefit of £62,500 and this amount will not be included in Mary’s estate. The estate has a value of £299,000 and the taxman will not take any inheritance tax.

By signing some forms to place her life insurance policy in trust, Mary saves £39,600 in tax and each child receives £19,800 more, tax-free.

What is the Catch?

There is no catch. The assurance company provides all documentation, which is standard, free of charge. Our experts even complete the documentation at no charge. All you do is provide the broker with information regarding beneficiaries and sign the document. A solicitor is not required. If a claim is filed, the life insurance company must pay out directly to the policy beneficiaries and the transaction is then considered complete.

Even if a life insurance policy is taken for mortgage repayment, it should be written in trust for a partner. The money will be paid directly to the partner rather than to the estate that will use it to repay the mortgage. This eliminates legal delays, fees for probate and a solicitor, and simplifies the process. Your partner can use the money to pay off the mortgage. Whether this approach also reduces inheritance tax depends on the value of your estate and how your will is structured.

Putting Your Life Insurance Policy in Trust: A Winning Situation

We believe that you win when your life insurance policy is written in trust and we do not see any drawbacks. These days, winning situations like this one are difficult to find.

Inheritance Tax Planning Advice is not regulated by the Financial Services Authority.