Writing a Policy 'In Trust'

In the event of your death or diagnosis with a terminal illness your life insurance provider will make a payout to your survivors called the 'sum assured'. Unless you nominate a specific person to receive this sum, it will become a part of your estate. Your estate is essentially everything that you leave behind when you die, including your home, savings and debts. If the total value of your estate exceeds the government-determined inheritance limit, your survivors will have to pay inheritance tax on the money they receive.

As of April 2008, the inheritance tax threshold is £312,000 rising to £350,000 in 2010: if your total estate exceeds this amount, your survivors will have to pay forty percent tax on the excess. However, if you are married or in a civil partnership you automatically qualify for a joint inheritance allowance of £600,000. This means that when the first partner dies and their estate passes to their partner, their partner is then able to pass their joint estate, with a value of up to £600,000 (rising to £700,000 in 2010), to their children or other surviving family members when they die: inheritance tax free.

Often, the sum assured your insurer pays out is substantial, and added to the value of your home and other savings it is likely that the total value of your estate will exceed the inheritance tax threshold, leaving your survivors with a large tax bill. In addition, it is common for your survivors to be left waiting for a considerable length of time before the necessary administration is completed on your estate. If your survivors are in dire need of financial assistance following your death and the loss of your income, this delay can create monetary difficulties.

However, there is a way to reduce the tax bill and ensure that the payment is straightforward. Writing a life insurance policy 'in trust' means that the pay-out is omitted from the total estate calculation. Firstly, the inheritance tax bill may be greatly reduced, or even eliminated, when the value of the estate is reduced. Additionally, writing your policy 'in trust' ensures that the money is paid promptly and to a person you nominate, without any need to refer to your Last Will and Testament. You may specify exactly who will receive the pay-out and, if it should be made to more than one person, how much each beneficiary should receive. Most insurance providers will offer the choice of writing your policy in trust. It is very easy to arrange, usually requiring only a few extra forms, and typically it will be at no extra cost.

There is nothing to lose by writing your policy 'in trust', especially considering the possible inheritance tax bill that your survivors may otherwise have to pay on the proceeds of the policy. Even if you have already taken out a life insurance policy, it is usually still possible for it to be placed 'in trust': there are no rules that say that this must be done initially. You can also avoid your survivors having to pay excessive taxes using a Life-Of-Another insurance policy.


For details, see:

• Life-of-Another Policies