Family Income Benefit - need a trust?

mozz100

I've searched the web and these forums and found a couple of posts suggesting that Family Income Benefit (F.I.B.) policies are worth putting "in trust".

None of them quite match my situation, so I'm looking for advice/suggestions, please.

My wife and I are looking to provide for our soon-to-be-born daughter in the event one/both of us dies. We already have a joint decreasing term policy to cover our mortgage in the event one of us dies. No other significant debts.

We feel that F.I.B. is what we want, and the premiums make it worthwhile us each taking out an individual policy, it being only slightly more expensive than a joint policy for 2x the amount of cover.

My question is: should I put my F.I.B. policy in trust? Since, in the event of my death, the policy would pay a recurring income to my heir(ess(es)), would there be a benefit from either:

- an inheritance tax point of view?
- the point of view of expediency? ie. speed with which the income can be provided

So, shall we appoint trustees, and fill in the forms? Or just get the policies "straight"?

Massive thanks in advance for any pointers.

kingstreet

I'd write them in trust. Probate won't then be required in the event of a claim and you know you'll have someone you can trust ensuring the money is used as you would want it to be used.

Use a discretionary trust as it has the flexibility to payout to your spouse in the first instance if you pre-decease her and to adapt to you having more children in the future.

magpiecottage

kingstreet wrote: »

Use a discretionary trust as it has the flexibility to payout to your spouse in the first instance if you pre-decease her and to adapt to you having more children in the future.

There is an argument against having the spouse as the initial beneficiary in case they do not survive you (both die in the same car accident, for example) - otherwise it goes into her estate and will count toward Inheritance Tax and need to await probate.

It depends on the Trust, though. It should have a survival clause and permit surviving trustees to change the beneficiary after your death.

Be aware that a sole surviving trustee cannot normally appoint themself as a beneficiary.

weighty1_2

magpiecottage wrote: »

There is an argument against having the spouse as the initial beneficiary in case they do not survive you (both die in the same car accident, for example) - otherwise it goes into her estate and will count toward Inheritance Tax and need to await probate.

This is incorrect. Provided there is at least one surviving trustee then the trust remains in tact irrespective of whether the default beneficiary is alive or not. It would simply be down to the surviving trustee to use their discretion as to whom should benefit, or follow any instructions within a letter of wishes had one been completed.

This is the reason why i always recommend having at least 2 additional trustees, when a husband and wife are policyholder and beneficiary and are acting in the capacity of trustee.

System

The policy would pay a recurring income, rather than a capital sum. How would such income be treated under trust taxation?

How long would the payments last? Payments to a specific beneficiary, eg widow, obviously have a finite duration, but what happens if they are paid into a trust?

weighty1_2

Income from a life insurance policy is not treated as "income" liable for income tax. It is simply a pay-out from an insurance plan which is paid as an income rather than a lump sum. In the event of a claim the insurance company can provide a commuted value based on what they would pay out if the proceeds were taken as a lump sum instead of an income.

For a plan written in trust if this commuted value is less than £325,000 then there is no charge to the policy. If the commuted value is over this and the life assured has died close to a 10-year anniversary of the trust being formed then there could be a periodic charge of 6% of the balance over £325k. This periodic charge occurs at each 10th anniversary therefore multiple 6% charges can be made on the trust as the commuted value decreases over time.

These periodic charges do not allow for the use of a spouses nil-rate band allowance and therefore it is possible that charges are applied which would not occur if the plan is not written into trust. However, the other option (not placing the plan into trust) could result in a 40% inheritance tax charge should the spouse pass away within a short period of time of the policy holder.

yada yada yada - this is my understand of taxation of trusts. There can be other issues such as exit charges or a periodic charge being levied when the life assured if still living but in dire health, however, this is beyond the scope of my message.....

mozz100

I'm super grateful for all the input.

I'm kind of glad I asked, and wish I hadn't at the same time.

What's this 10 year anniversary rule? Commuted value?

If it helps, I'm looking at a 20 year term and £30k per annum, seems to cost in the region of £13 per month if I bash in my details, less for my wife.

weighty1_2

The commuted value is the amount the life insurance company would pay out if you requested to change the income to a lump sum (which most providers allow). Typically is it around 70% of the amount you would get if the plan paid the full income entitlement.

For example - your plan - 20yr x £30k = £600,000 possible payout. You die in month 1 and your wife wants to commute the amount. The provider might pay out ~£420,000.

The 10yr anniversary rule basically revolves around the value of the trust at each 10-year anniversary after it is set up. If you are in good health at the 10yr anniversary there is normally no charge (especially for term assurance) since there is little value in the plan). If you are expected to die in the next few months, or have already died at the 10-year anniversary then this is when the commuted value is looked at and everything over £325,000 has a 6% charge applied.

One way around this charge is by setting up multiple trusts. Eg. you take out 2 FIB plans each over 20yr for £15k per annum benefit. Since the maximum possible payout would be less than £325,000 there would be no periodic charge in any circumstance.

This is all based on my understanding of trust taxation and lengthy discussions had with the technical teams within various life offices. If you wish to follow this information I strongly suggest you seek advice from a relatively qualified individual yada yada yada

mozz100

Thank you for the explanations, much appreciated, again!

The commuted value is the amount the life insurance company would pay out if you requested to change the lump sum to an income

This has me confused a bit. If I'm understanding you, isn't it the other way around? The commuted value is the amount the life insurance co would pay out if the income were turned into a lump sum...

mozz100

...plus, at the first 10 year anniversary there'd only be 10 years left on the plan, right? At that point the max possible payout is 10x£30k.

weighty1_2

mozz100 wrote: »

Thank you for the explanations, much appreciated, again!

This has me confused a bit. If I'm understanding you, isn't it the other way around? The commuted value is the amount the life insurance co would pay out if the income were turned into a lump sum...

It is the other way round so I've sneakily edited my post!!!

mozz100 wrote: »

...plus, at the first 10 year anniversary there'd only be 10 years left on the plan, right? At that point the max possible payout is 10x£30k.

Oh yeah, I failed to spot that! lol
Also, because the commuted value is typically less than the full payout amount this would be reduced further therefore no periodic charge!