So, you’ve taken the important and extremely sensible steps of putting life insurance in place. That’s great : it means that you have the peace of mind of knowing that in the event of your death your loved ones will receive a monetary sum which will help them considerably as they navigate their way through their financial future without you. Or will it? Well, this depends largely on whether your life insurance policy has been put into a trust.
If your policy has not been written into trust, it will form part of your estate when you die and in the (likely) event that it then takes you over the IHT threshold, up to 40% of the sum that was intended for your family could in fact go to the tax man. Not only that, but if you leave any debts behind when you die and your policy has not been written into trust, the money may be diverted away from your family and go towards paying off those debts.
When you place assets, such a life insurance policy, into a trust, you effectively cease to become the owner of that asset and it instead becomes the ‘property’ of the trustees of the trust. Importantly, the asset no longer forms part of your estate upon your death and would not be taken into account when calculating any IHT payable.
There are two main types of trusts : bare trusts and discretionary trusts. If you were to place your life insurance into a bare trust your trustees would ensure that, on your death, your life insurance is paid to your nominated beneficiary or beneficiaries, absolutely. However, where a discretionary trust is used, your trustees have the discretion to decide how much and when to pay your beneficiaries which could depend on such factors as their age, financial circumstances and need.
Taking your life insurance policy out of your estate by placing it in a trust also means that your family are unlikely to have to wait for the lengthy probate process to complete before receiving the money from the insurance company. In fact, the pay-out will be received significantly quicker, usually within a couple of weeks of sending the death certificate to the provider. If your loved ones have a mortgage and other significant bills to pay, this can make a huge difference to their ability to meet these financial demands after your death.
If you wish to take out life insurance or are unsure whether the life insurance policy you have is written into trust, please contact my colleague Laura Jordan on 07808 025894 or visit her at www.facebook.com/laurajordanmortgage.
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