Peace of mind involves a multiplicity of elements
One is how well you provide for your loved ones in the event of your death
This latest article in the Life Matters series focuses on how you can include more security in your estate by incorporating a life insurance policy. And then, by considering the potential advantages of writing the policy in trust as well.
What is a life insurance policy?
Life insurance is a financial product that will pay a lump sum if you were to pass away within the policy term. Having a life policy in place can help give your loved ones peace of mind that if anything happened to you, there will be a pot of money to help pay the bills, any outstanding mortgage or help maintain a standard of living.
Do I need life insurance?
This is a personal decision and is very much dependent upon your circumstances. A financial adviser would be able to discuss your position and advise you of the policy options available.
I encourage clients to consider what would happen if they were to pass away without a policy in place. For example:
- Can your surviving partner and family afford any outstanding mortgage?
- Can your surviving partner and family maintain their standard of living?
- Will your estate be subject to a substantial Inheritance Tax liability?
Who will benefit from the policy proceeds?
It is always worth checking with the policy provider what will happen to the policy proceeds after you have passed away.
It may be that the policy is paid to your estate. The policy will therefore be an asset of your estate to be subject to Inheritance Tax and the proceeds will pass to the beneficiaries named in your Will.
Alternatively, the policy can be written in trust. This is a legal arrangement that will take the policy outside of your estate for Inheritance Tax purposes. Many policy providers will have standard trust deeds that can be completed. You can name the people you want to benefit and to what extent. In some cases, your intended beneficiaries will be the same beneficiaries as in your Will.
Should my policy be written in trust?
I look at my clients’ circumstances on a case by case basis. Usually, I would recommend that my clients consider writing their policy in trust. Not only does this have substantial Inheritance Tax advantages but it often means that your intended beneficiaries can access the policy proceeds sooner than if they were paid to the estate because a grant of probate is not then required.
Should I use the insurance provider’s standard documents?
Again, this is something that I consider on a case by case basis. In some situations the standard documents are perfectly sufficient. It is a cheaper and simpler option and many clients are able to complete the paperwork themselves without professional involvement.
However, in some cases, I would recommend that clients have a bespoke trust policy.
Many clients will consider what would happen on their death but, for estate planning to be effective, you have to look beyond this and consider the wider family circumstances.
For example, many people would want their spouse or partner to benefit from the policy. However, you need to consider whether increasing the survivor’s estate with the value of the policy is just going to increase the Inheritance Tax liability when they pass away.
Setting up a bespoke trust
Trust documents are put in place so that when you pass away, the policy proceeds are paid to the trust and not to your named beneficiaries. With a well-planned and managed trust, your intended beneficiaries are able to benefit from the policy proceeds but with the advantage of the proceeds not forming part of their estate to then be taxed on their death.
If you want to look at putting a bespoke trust in place, it is important to ensure that you receive legal advice about this, especially to ensure that there are no unintended consequences.
At Lester Aldridge, we are able to advise you on setting up bespoke trusts and the legal, practical and tax implications of this.
Parisa Jones, Senior Associate
01202 786267
www.lesteraldridge.com
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Life Matters: Lester Aldridge Solicitors on a wide range of legal matters
Life Matters is a regular monthly feature on Lymington.com, which covers a wide range of legal subjects and is always written by one of the Lester Aldridge team. You can see a list of all published articles by clicking to the Lester Aldridge Solicitors webpage on Lymington.com here.
