One of the UK’s biggest life insurance companies recently pointed out that only 1% of life insurance policies are written in trust. This should not be the case and in this article we explain why.
By having your policy Written in Trust”, it means that if a claim is made, the beneficiaries named on the policy receive the payout directly. If you’re not in the know, then you could be forgiven for not understanding the significance of this. The life insurance companies, however, should know better.
If the life insurance policy is Written in Trust”, the payout in the event of a claim will not be subject to inheritance tax because it never becomes part of your legal estate. The following figures explain how it works.
Mr Smith’s wife died a few years ago, so he wants his two sons to inherit his estate. He owns his home which has a current market value of 245,000, with 10,000 still left to pay on the mortgage. He also has stocks and shares amounting to 52,000, and his car and other belongings add another 18,000 to his value. Mr Smith has life insurance policy for 100,000 but he did not have the policy written in trust. We are working on the assumption that it would cost 5,000 to administer his estate and to obtain probate.
If Mr Smith died tomorrow, he would leave a total of 400,000 for his sons, however that would be subject to inheritance tax. The value of his estate that goes above 275,000 would attract a tax charge of 40%, so all in all 50,000 would be taken away for tax, and each son would inherit 175,000.
If we do the exact same calculation again, this time assuming that Mr Smith’s life insurance policy was written in trust, then it’s quite a different story. The life insurance company pays out 50,000 each to his sons, so that 100,000 policy cannot be included in Mr Smith’s estate. Consequently, the estate is worth 300,000, so only 25,000 of that is subject to the 40% tax charge. As a result the taxman only gets 10,000, and the sons get an extra 20,000 more, all for having the policy written in trust.
All Mr Smith had to do was sign a few forms, and 40,000 tax was saved!
There is no extra charge for having your policy written in trust, the documentation is standard and the life insurance company will easily process the forms for you. You just need to provide details of your chosen beneficiary(ies), and sign the form simple as that. A life insurance broker can also provide the forms, free of charge there’s no need for a solicitor. If a claim is made, the payout goes directly to those intended the only loser is the taxman, and we find it very hard to feel sorry for him.
If your life insurance policy is designed to cover your mortgage in the event of a claim, you can also have that Written in Trust”. Then the money can be paid directly to your partner, who can use the money to pay off the mortgage personally rather than the money going through your estate and then paying off the mortgage. This avoids legal delays, solicitor’s and probate fees, all of which are time consuming and very involving. Any saving you make on inheritance tax will depend on how much your estate is worth, and the structure of your will.
We can’t see any drawbacks to getting a life insurance policy written in trust, it really is a win-win situation and it’s not often that we see those!
On a separate note, whether your life insurance is written in trust or not, you still need to make sure you have an up-to-date Will.