Family Income Benefit - In Trust???

jonny2510

I've just applied for a Family Income Benefit policy (from Scottish Provident), and as part of the process requested the forms to put the policy in trust [Gift Trust (Joint Life, First Event) – Discretionary]

Upon reading the small print, I'm wondering it it's worth it?

From what I know, the Family Income Benefit provides a tax free benefit anyway, so as far as I can see the trust won't provide any inheritance tax avoidance benefits.

In that case is putting a FIB into trust just to ensure the money bypasses probate, and starts getting paid straight away?

Are there any other advantages?
Are there any disadvantages in putting it into trust?

The policy is joint (with the aim to provide each other with an income for x years should one of us die), and to provide something for our daughter should we both die...
EDIT: the policy is for death only - there is no critical illness cover included...

weighty1_2

Generally joint plans are not placed into trust as they automatically pay to the surviving party in the event of a claim thereby bypassing probate/intestacy. Normally, a joint policy, if written into trust, has to be left for the benefit of people other than the policyholders such as their children. This can create issues in itself as the surviving spouse becomes culpable for how the money is spent for their children's benefit.

Whilst the benefit may be paid out tax free HMRC would request a commuted value of the policy in the event of a claim. This amount would then potentially be used to calculate any possible IHT liability.

kingstreet

Ordinarily, you probably wouldn't write such cover in trust.

However, if you consider what the gift trust actually does, it may explain itself to you...

"this trust allows the surviving policyholder to receive the proceeds if they are still alive 30 days after the death or diagnosis of a terminal illness of the first life assured."

One of you dying isn't an issue. The survivor gets the benefit.

But what happens if you both die together, or within a short space of time one dies, then the other? The trust then receives the proceeds and the trustees apply it according to your wishes and for the benefit of your beneficiar(y/ies).

Without the trust, the probate/IHT question raises its head again.

Using the discretionary route means the beneficiary clause will be flexible enough to include any future children which may be born to you during the life of the policy. This can be changed at any time too, should you wish to do so.

I have joint death or earlier critical illness cover and family income benefit with ScotProv and I've just decided I'm going to print off the (split/discretionary) trust form and complete it as I feel it's the right thing to do...

jonny2510

kingstreet wrote: »

I have joint death or earlier critical illness cover and family income benefit with ScotProv and I've just decided I'm going to print off the (split/discretionary) trust form and complete it as I feel it's the right thing to do...

Thanks for your help in interpreting this. Knowing that you're going to complete it certainly puts my mind at ease somewhat (assuming we are in similar situations/want the same things!). I think I'll read it all again to try to make sure I understand it fully, before completing it.

If I'm not pushing it, could I ask if when you're completing the form you notice anything that makes you decide against submitting it, or anything you think someone filling it out should be wary of, that you post back here?

kingstreet

I have a wife and 1 child. The death or earlier critical illness cover is for mortgage repayment and the additional FIB is for family protection - replacement income for survivor if one of us dies and for our daughter if we died together.

I have to use a split trust as I have critical illness cover.

I can't see any difference between us. The usual difficulty is getting the two of us and the potential trustees together to explain to them what their role will be and what they have to sign.

I can't see any pitfalls in doing this. I'm sure if there are, one of the IFAs, dunston or stephenni, will let us know.

jonny2510

kingstreet wrote: »

I have a wife and 1 child. The death or earlier critical illness cover is for mortgage repayment and the additional FIB is for family protection - replacement income for survivor if one of us dies and for our daughter if we died together.

I have to use a split trust as I have critical illness cover.

I can't see any difference between us. The usual difficulty is getting the two of us and the potential trustees together to explain to them what their role will be and what they have to sign.

I can't see any pitfalls in doing this. I'm sure if there are, one of the IFAs, dunston or stephenni, will let us know.

Just out of interest, did you ever get round to putting your policies in trust?

There were delays in our application, meaning the policy only started this year, so I've only just got round to looking at it again...

kingstreet

Yeah. I did it a few weeks later, IIRC.