Trusts and life assurance
Trusts are great for putting the policy proceeds in the hands of the people who need the money. They’re fast, too. It’s far quicker than waiting for probate.
Using a trust can also save 40% of the payout because proceeds are usually exempt from Inheritance Tax. With the frozen Inheritance Tax nil rate band at £325,000 per person, more and more of us are finding that we owe some Inheritance Tax, so putting life assurance trust really matters.
You can use a Trust if you have any of these:
A life assurance policy to cover your mortgage, usually called ‘mortgage protection term assurance’. It could be with any insurance company, but the big players in this market are Aviva (was Norwich Union), Aegon, Legal & General and Zurich.
Life assurance to give your family an income, usually called ‘family income benefit’. The big players are Aegon and Legal & General. A lot of companies don’t provide family income benefit cover, which is a shame because it’s inexpensive.
Life assurance to give your family a lump sum, called ‘level term assurance. It could be with any insurance company. If it isn’t with Aviva (was Norwich Union), Aegon, Legal & General or Zurich.
Death In Service’ pension benefit through your employer.
Just tot up what you’re worth – the house, contents, cash, ISAs, windfall shares, other investments? single premium investment bond?
Now, add on your expected life assurance payouts.
Might it add up to more than £325,000 if you’re single? (Probably twice that if you’re in a couple.)
Much more importantly: You can tell your friends that you have a “Trust Fund”. You don’t have to tell them that there’s no money in it.
Because this is a website, we can’t ‘recommend’ which type of trust you should use, but we will do that if you want our help.
There are two main types of trust available to you – flexible trusts and absolute trusts (also known as bare trusts). These trusts have different features and, since the 2006 Budget, different inheritance tax treatment.
Flexible trust
A flexible trust allows you to make any changes you need to the beneficiaries; change the proportions they receive; add new beneficiaries (remove beneficiaries); any change you like. This can be handy if there may be more children, or grandchildren, to come along later.
Tax shouldn’t be a problem….
Premium payments will normally be exempt from Inheritance Tax, as you pay for them from your normal income.
Trusts are checked for their tax liability every ten years, which is known as a ‘periodic charge’, but the value of your trust will be £0.00 if you are still alive and in reasonable health, because your policy has no cash value. The tax only applies only if the trust value is above the nil rate band (£325,000 as at September 2012).
So, when could there be tax? If you’re very unlucky, and you die the day before your ten year anniversary, the trust value will be pretty high because it will be the sum assured. The tax would be 6% of the value if it’s above your Inheritance Tax nil rate band. The tax is due when the sum assured is paid out, which is known as the ‘exit charge’
The chances are 12,775 to 1 in your favour against that happening.
Compared to a 40% tax bill on the sum assured by not using a trust, it’s easy. Use the trust.
If you don’t like having the chance of tax, then use an absolute trust.
Absolute trust
When you put a life policy into trust ‘absolutely’, by using an absolute trust, you set out who will benefit, and by how much. There is no opportunity to change the beneficiaries.
Tax shouldn’t be a problem….
Premium payments will normally be exempt from Inheritance Tax, as you pay for them from your normal income.
When the policy pays out, the benefits go directly to the beneficiary or beneficiaries in the proportions set out when the trust began.
The absolute trust still distributes the money outside of your estate, so using it should still save you 40% Inheritance Tax.
(We say ‘should’ because the HMRC can challenge actions if evading tax was the objective.)
Trusts pay out benefits faster and can save up to 40% tax on the sum assured.
Next steps:
If you want to talk over your options call Parsonage on 0161 928 2706.