When it comes to planning your family’s financial future it is important to look at all areas affecting your finances. One area that is overlooked by the majority of people is the use of a trust in connection with their life assurance cover. (If you don’t have life assurance cover then read my article explaining why you need life insurance)
What is a trust?
A trust allows you to set aside an asset for the benefit of a specified person or group of people (the beneficiaries). The asset is then managed by a trustee until such time as the beneficiary is intended to benefit.
Life Insurance policies are an asset that can be placed in a trust and this can have a dramatic consequence on how the payout is dealt with in the event of death.
What is the benefit of placing a life insurance policy in trust?
Under normal circumstances the payout from a life assurance policy forms part of the deceased estate and therefore possibly subject to inheritance tax. The threshold for inheritance tax in the UK is currently £325,000 with anything over this amount subject to tax at 40%.
By writing the policy in trust the proceeds will fall outside of the deceased’s estate and be paid direct to the beneficiaries. The proceeds will also be paid quickly as there is no requirement for probate to be granted.
Also, by writing a life insurance policy in trust you have control over exactly who will benefit from the proceeds.
Are there any drawbacks to writing a life insurance policy in trust?
No, not really but you need to make sure that any policies intended for other purposes, such as repaying a mortgage, are not placed in trust. Also there is more than one type of trust to suit different requirements so seek professional advice.
Although the option is not often used, placing a life insurance policy in trust will ensure that the full proceeds of the policy are paid to those intended, without being reduced by an inheritance tax payment.