Life Assurance As Part of Estate Planning - What You Need to Know
Life assurance has long been a recommended part of estate planning. Many people believe that having life cover in place will provide their loved ones with policy proceeds that are sufficient to see them through the estate administration process.
However, if a life assurance policy is not written in trust, it will form part of the policyholder's estate. This means it will be subject to inheritance tax and payment of the proceeds won't usually be made until a grant of probate has been obtained.
A policyholder should consider the type of trust to use; an absolute trust or a discretionary trust. We give a brief overview of the options below, but the practical aspects of putting a life assurance policy into trust will vary depending on the type of policy, the policyholder and the policy provider. Independent financial advice is essential when considering these options.
Discretionary Trusts
When life assurance proceeds are left on discretionary trusts, a number of potential beneficiaries may benefit, but none of them has an absolute entitlement. The policy trustees have discretion about which of the beneficiaries to benefit, the amounts to pay and the timing of payments. This can be particularly useful in the case of parents or grandparents who wish to benefit future generations.
For discretionary trusts, the transfer of the benefit of a policy into trust will be a chargeable transfer for inheritance tax purposes. In HMRC's view, the value of the trust assets when they are transferred into trust will be nil, provided the policyholder is in good health at the time. This will probably be the position for most life assurance policies, however before putting a policy into trust, it is advisable to check the current market value of your policy with your policy provider. If the value of the policy exceeds £325,000 there could be an immediate charge to inheritance tax at 20% on the excess above this amount, as well as an assessment to inheritance tax every 10 years. Further premiums paid after the trust has been created should ideally be made from surplus income, so that they qualify as regular gifts from surplus income, which are not subject to inheritance tax.
Absolute Trusts
An absolute trust allows the policyholder to choose specific beneficiaries, such as a spouse or children. The beneficiaries will have an absolute entitlement to a fixed share of the proceeds on the death of the policyholder. Transferring a life assurance policy to an absolute trust will not be subject to the periodic and exit charges that apply to discretionary trusts. If the policyholder dies within seven years of paying the premiums on the policy and the chargeable transfer doesn't qualifying as exempt, a liability for inheritance tax may arise.
The amount of any tax liability will depend on the value of any other chargeable transfers or failed potentially exempt transfers made by the policyholder in the seven years before death.
If a named beneficiary dies before the proceeds are paid out, entitlement to the proceeds will pass to the persons entitled under the Will or intestacy of the named beneficiary.
It is important to take independent financial advice before transferring a life assurance policy into trust. Some may prefer the certainty of an absolute trust, however some policyholders may favour the flexibility offered by a discretionary trust.
To learn more about estate planning or if you have any queries, please contact Elizabeth O'Connell-Coyne in our Private Client team on 020 7665 0932, or complete the form below.