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Trusts Explained

Very few life assurance policies are ‘written in Trust’. We feel that is a poor reflection on the financial services industry.

If your life assurance policy is written in Trust then, in the event of a claim, the insurance company pays out directly to the beneficiaries you name on the policy without the delay of Probate.

If the life policy is written in Trust, the proceeds from the policy never form part of your legal estate and so are not subject to Inheritance Tax. The importance of this is illustrated in the following scenario :

Simple example of life assurance policy not ‘written in trust’ :

Take Mr Smith. He is single and wants to leave everything equally to his two children. He owns his home which is currently worth £300,000 with no mortgage. His investments and other assets are valued at £25,000. He also owns a life insurance policy for £100,000 which is not written in trust.

If Mr Smith were to die now, his estate would be worth £425,000 less Inheritance Tax. Inheritance Tax is currently charged at 40% on the value of his estate over and above £325,000 – that means that the taxman will walk off with £40,000 (£100,000 x 40%) and his children would each receive £187,500.

So, what if the policy was written in Trust :

With a policy written in Trust, the life insurance company pays out directly to his children, so they each receive £50,000 straight away and none of the money is included in Mr Smith’s estate. This means that his estate is now worth £325,000 and the taxman walks away with nothing! Each of his children receives an additional £20,000 and tax-free!

So simply by signing a few forms (at no cost to him), Mr Smith saves £40,000 tax!

Is there a catch?

No – all the documentation is standard and is provided totally free of charge by the life assurance company. Your adviser will complete the documentation with you, again free of charge. Solicitors are not required.

Even if your policy is designed to repay a mortgage, it should be Written in Trust for your partner. Then, rather than your estate receiving the money and using it pay off the mortgage, the money can be paid directly to your partner. This saves legal delays, solicitor and Probate fees and lot of hassle at one of the worse possible times. Your partner can then use the money to personally pay off the mortgage. Whether this also saves you Inheritance tax will depend on the value of your estate and how you have structured your Will.

So in summary, a policy written in Trust will, on claim : 

  • Direct to policy proceeds to who you intend it for
  • Avoid delays of the Probate system
  • Avoid Inheritance Tax on the proceeds 

Call us on 01277 369 711 for more information.

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