Did you know that you could avoid inheritance tax and maximise the pay-out for your loved ones by writing your life insurance in trust?
When taking out life insurance, you’ll want to set it up in such a way that the beneficiaries of your policy do not have to pay tax and that the policy pays out quickly without having to go through probate. Putting your policy into trust is a great way to do this. New policies can be put into trust at onset and existing Life policies can be put into trust at any time during the term of the policy.
What is a trust?
A trust is an asset that is set aside to benefit a particular person (or group of people) called the beneficiary. Until the beneficiary is intended to benefit from the trust, it is managed by a trustee. For example, if you’ve set up a trust for your children, then either your spouse or another relative might look after it until say, they reach 18. Life insurance policies can be put into a trust (known as writing it in trust), affecting the manner of the pay out in the event of your death.
Avoid inheritance tax and probate
One of the biggest benefits of writing your life insurance policy in trust is that you can actually sidestep paying inheritance tax as the value of the policy will not count towards the value of your legal estate. Normally, when you die, the value of your legal estate is calculated and anything beyond the threshold of £325,000 is taxed at 40%. (The estate may also qualify for Main residence nil rate bad of up to £175,000 providing the property is left to a direct descendant) If you have out a conventional life insurance policy, then the value of it will be included in the calculation of your legal estate. However, if your life insurance is placed in a trust, then the proceeds from it will be sent directly to the beneficiaries and not to your estate, therefore not counting towards the inheritance tax threshold.
Another benefit of writing a life insurance policy in trust is that the whole process of the pay-out is somewhat more streamlined, as you don’t need to go through probate.
Normally, when the time comes for your life insurance policy to pay out, a legal process must be undergone by which the executor’s authority to deal with your assets is confirmed. This is known as the granting of probate.
This can be a long process, particularly when there is no will (known as intestacy), but even if there is one it can take a while.
If your life insurance is put into a trust, then probate can be bypassed altogether; all that is needed for the policy to be paid out is for a death certificate to be provided.
There are a number of different trusts you can use – a Discretionary trust is the most common or sometimes a bare trust may be used, its important that you understand the differences and choose what is right for you. A discretionary trust is one in which the trustee has a wide discretion in relation to the dealings with the trust property or monies. A bare trust is one in which the trustee has no discretion, but has nominal control, and only one duty, namely to convey the property or monies on demand to a specified party.
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