Life Assurance payout and Inheritance Tax

lfnfan

Hi.

I am researching Level Term Life Assurance policies for my wife and I. And also researching Wills. We are expecting our first child in a number of months, all being well, which is a lot of the reason for this activity.

My question is: do I need to consider how we draft our wills in order to reduce IHT in the sad instance that my wife and I both die during the term of the policies. Each policy would pay out a lump sum above the IHT threshold.

Without factoring in Life Assurance payouts, our affairs (no pun intended) are quite simple, and our combined assets are below the IHT threshold.

Thanks for any help / comments

EdInvestor

Life assurance policies if written in trust (make sure this is done) are not part of the estate and thus do not count for inheritance tax.Same case with pensions.

lfnfan

Thanks for the response Ed. That's good to hear, but not sure how the payout is ring-fenced?

For example, 400k payout from spouse 1 policy to spouse 2 (written in trust). Then, payout from spouse 2 policy + residual payout from spouse 1's policy + other assets to child. What would be liable to IHT from spouse 2's estate, assuming it goes to the child?

Still a bit in the dark!

dunstonh

but not sure how the payout is ring-fenced?

You either have the policy owner different to the life assured or you place the place the policy in trust. By placing it in trust, it means that the policy owner does not receive the benefits on death. The beneficiary of the trust does. Therefore it bypasses the estate.

For example, 400k payout from spouse 1 policy to spouse 2 (written in trust). Then, payout from spouse 2 policy + residual payout from spouse 1's policy + other assets to child. What would be liable to IHT from spouse 2's estate, assuming it goes to the child?

You wouldnt write the trust with the spouse as the beneficiary. You would use the children.

lfnfan

Think I've got it. So:

Husband takes policy written in trust to Wife
Wife takes policy written in trust to Husband

Husband dies. Wife receives policy, outside of Husband's estate. No IHT payable on policy payout.

Wife amends her policy to written in trust to child.

Wife dies. Child receives policy, outside of Wife's estate. No IHT payable on wife's policy payout.

IHT payable on wife's estate (excluding proceeds of Wife's policy, but including residue of Husband's policy payout).

Thanks for your help - much appreciated

lfnfan

sorry to be a PITA

pls can you confirm that I have understood your comments correctly with my post above.

Many thanks

dunstonh

Husband takes policy written in trust to Wife
Wife takes policy written in trust to Husband

Husband dies. Wife receives policy, outside of Husband's estate. No IHT payable on policy payout.

There is no IHT between spouses. So, putting the policy in trust to the spouse is not required other than perhaps to speed up payment and ensure the spouse gets it (so not reliant on Will). By having the money paid to the spouse, you are creating a potential IHT charge on second death.

If you place the family protection side of things into trust straight away with the children as beneficiaries, with both you and your wife as trustees then the money is controlled by surviving spouse which can be used for the provision of cost of living for children, education etc. This can include housing related costs as they have to have a home. Basically, anything the children benefit from (day trips, holidays, parental related costs as well). So, you can move a heck of a lot of the sum assured out of the estate totally.

lfnfan

wow. Thanks for the clarification. I had completely the wrong end of the stick.

So having a life assurance policy 'written in trust' means that I set up a trust eg. 'LFNFAN Family Trust' and have the life policies written with the actual trust itself as the entity that the policies pay out to?

If so, that makes a lot more sense to me than how I was seeing it before.

localhero

This is generally not my area of expertise, but for couples with a potential IHT problem on second death, then a `spousal bypass trust` should be considered.

It provides flexibility, in that the surviving spouse may `borrow` the assets from the trust which becomes a `debt` against their estate when they die.

Obviously the services of a decent IFA will be required - and there may be other options available.

Here's a link to a document that explains it - I have no connection with this firm.

http://www.jameshay.co.uk/DocumentView.aspx?DocumentID=152&DocumentRef=JHAY0327

lfnfan

I followed that link, and did some more googling. I feel like I have just stepped into a minefield :eek:

Quite a few different types of trust out there, and they all seem to get [STRIKE]screwed [/STRIKE] treated in different ways when it comes to taxation, and also have various restrictions on who can benefit from the income / capital and when, and what sorts of assets can be included, and so on.

As a general observation, sometimes I honestly do wonder why I bother working hard when I see that not only do I pay tax on my income (and out of that taxed income I also pay value added tax on goods I buy, tax on fuel, and road tax to get to drive my car, council tax for who knows what, stamp duty if I want to buy a house to live in, even tax on beer should I decide I want half a lager, and so on) but that even when I turn to protect my spouse and childrens financial wellbeing after I am dead and buried, I will also have to pay tax for the privilege of doing that. It's quite remarkable.