You have worked for years, and paid a generous portion of your hard-earned cash into one or more life insurance products to benefit your family. However, there is a simple method of ensuring that the benefits are transferred to them with the minimum of complication, and with maximum protection from the spectre of that grim (financial) reaper, the taxman.
One super-efficient tool for ensuring a smooth transfer of monies is to set up your life insurance in trust.
When you create your life policy in trust you make three crucial and extremely positive steps to helping your family receive their payout from your life cover, with the minimum of fuss.
First, by creating a trust you can specify the names of those you wish to receive monies from your policy. This has the advantage that when the money transfers down to your children, there will be no inheritance tax due. Given that inheritance tax can gobble up 40% of a policy payout, filling out one simple form can save your children a fortune, this is why inheritance tax planning is a crucial aspect.
The second advantage is that life insurance policy payouts made through an ‘in trust’ arrangement do not count towards what, in relation to Inheritance Tax, is known as your ‘estate’.
Your estate is a calculation of your total wealth. This includes not only your house, but also your various bank/building society accounts, investments (shares, funds, premium bonds) and other assets held in your name, including cars and your holiday home.
This total figure is then reduced by your liabilities, such as owings on your mortgage balance, credit cards, and even the cost of your funeral.
On the resulting sum, you have an allowance of (currently) £325,000 per person, with everything above that liable to Inheritance Tax. (Use our Inheritance Tax calculator to estimate your estate’s liability.)
However, since your life cover is now ‘in trust’ it is no longer included in these figures, and so does not push up the value of your estate towards or into the bracket where inheritance tax may apply.
The third benefit is that your life cover, being ‘in trust’, is paid quickly following your death. Otherwise the payout could have been delayed by between three months and three years, while lawyers settled your estate.
Setting up your life insurance in trust can be achieved quickly and relatively easily by your financial adviser
