Life Assurance to dodge IHT

glottalstop

Well I thought this was sorted, but it is rumbling on.

First the good news - the IFA files, my parent's Will file, and policy information from the life company has been obtained. It all seems to show that the proceeds amounting to around £160K should have passed to my father's Estate on death, and the life company released the funds on that basis.

The former Executor was a life-assured but he was not a designated policy owner. I think because he is potentially a higher rate tax payer he briefly assigned the policies to a third person (a non-tax payer) to cash them in and subsequently received the proceeds himself.

The new administrator appointed by the courts has decided on the evidence that the proceeds should have formed part of the Estate, and I thought that had been agreed.

Except the former Executor has now presented his own version of Estate accounts to show that the proceeds of the life policies were his own personal funds. Hard to believe. The alternative as discussed before is that these funds should have been treated as a PET. And yet for the umpteenth time of asking he has refused to declare them a gift.

This is driving me nuts, have we missed something?

xylophone

You have already established that the policy was not written in Trust and that the Insurance company drew the cheque in favour of the Executor?

In that case, how can there be any doubt that the proceeds were due to the Estate?

It is up to the administrator appointed by the courts to resolve the matter?

kidmugsy

I suppose the moral of the story is that DIY efforts to avoid IHT are often more expensive in money or trouble than just paying the ruddy tax, especially if they are made rather late in the day.

glottalstop

The administration of this estate and the treatment of the proceeds of the "last man standing" life assurance policy are still in dispute.

You may remember that the former executor dealt with the policy company under probate eg on the basis that the funds formed part of the estate. The former executor was a named third life assured on the policy, but he was not a defined policy owner like my parents.

The former executor treated the policy benefit as his own and did not declare it to the tax man, eg not in the estate and not a PET gift. It is hard to tell whether this was his idea to sidestep IHT or my parents' intention.

The good news is that the new executor's administrator has recovered disputed funds into the estate, and has paid on account what she believes to be the tax due. She advises that signifcant penalties and interest may follow. To whom?

Unfortunately the administrator is struggling to reconcile her accounts, even though all parties agree quite narrowly what the size of the estate was and we are clear where it has been distributed to within 1%. She can't explain her difficulty or how big it might be, and won't open up her books to see if we can spot the problem/answer. Meanwhile she is sitting on a large pile of cash and her fees are clocking round as you can imagine. What might that problem be?

A curious twist. Part of the estate was used to buy a council house on behalf of one of the equal beneficiaries who is unconventional at best and might be judged less than fully competent. There was a substantial market price reduction available to him because of long tenure, which the former executor seems to have taken into consideration when awarding himself a bigger slice of the estate cash. Does that seem right?

xylophone

The beneficiary on whose account the house was purchased was left a fixed sum or a percentage of the residue?

He should have received that fixed sum or residue - the former executor had no right to take the view that because the price of the house was below the value of the bequest, he should therefore trouser the excess?

You speak of the new executor's administrator - it is up to the executor to clarify the nature of the problem with this person?

SeniorSam

Any financial adviser that has recomended a life policy to be set up for the purpose of helping to meet inheritance taxes should have known that the policy needs to be written in Trust. Without a Trust, the proceeds add the the value of the estate would increase the liability, so that would be incorrect and irresponsible. Even though an adviser retires or moves to another company, or the company that set the policy up was no longer in existance, the liability still passes to the company that took over the clients from another.

I believe that the executors should be looking for compensation from the company concerned.

In my time as an adviser, I came across a few such cases where a Trust was not set up and should have been. In each case the clients were compensated by the company concerned. That is why they carry liability insurance.

Someone is not looking in the right direction her, or simply does not understand how the responsibiity should be aportioned. There should be fiule notes to say that the policy was for inheritance tax mitigation and as such th liablity is for the company to meet the extra tax. The matter of someone trying to 'pocket' the benefit, without that being clarified in a Will would be resolved if it can be proved that a Trust should have been put in place.

Sam

xylophone

Fairly recently, a policy which seems to resemble this was under discussion.

https://forums.moneysavingexpert.com/discussion/comment/69097235#Comment_69097235

glottalstop

I have seen extracts of the file and it seems the IFA did attempt to advise my parents about IHT and trusts. The context in March 2009 was post-crash to find a form of investment which combined growth with protection of capital, the purpose being to secure an inheritance for their children. They flatly refused to discuss IHT planning or the use of trusts. How hard is the IFA supposed to press?

The policy was set up as providing for my parents - eg their estates. What is not discussed or explained anywhere in the file - why did they add a third life assured, the person they later appointed as their sole executor? It required the former executor to prove his identity and sign up, so he must have known about the policy intentions.

Many thanks for that link to the similar situation, which does suggest tax avoidance is involved.

Did the former executor spot the opportunity to sidestep the taxman - there is some evidence to suggest he sought advice from a top-tier private wealth manager (XYZ WM unfortunately hiding behind a wall of confidentiality) and placed the policy into third party administration, eg the funds would be held until they could be made available tax-free on assignment or to his own Estate as a residuary life assured.

At some stage I think the IFA and the former executor will need to explain what they did and why. Not co-operating as yet.

My parents had a similar conversation with the solicitor who helped write their final wills a year later. The solicitor did a quick reckoning and pointed out that they were in danger of "slightly" exceeding the IHT threshold. Again they refused to discuss IHT planning or trusts.

They did set about gifting more actively from that point, with cash sums and deposits into pension plans for grandchildren from capital and surplus income. All too late and not enough to escape IHT - even setting aside the life policy in question. Massively out of character, my parents were stubborn but not stupid and were penny-wise, they would have known their financial position accurately. They were obsessed with not paying any more tax than necessary, but I cannot believe they would have set out to deliberately break the rules.

Keep_pedalling

I don't see why the IFA has anything to explain, you parents explicitly refused any advice on IHT planning, and appear to have gone down some dodgy DIY route with this executor. It sounds as well as being obsessed with avoiding IHT, they felt the same way about paying for advice to achieve their aims.

SeniorSam

In the past, I have had clients who were made aware of the IHT liability to their estate and how this may be mitigated with careful planning. They did not wish to do any IHT planning, so that fact was clearly documented in the letter following up the meeting.

Where a third pary is involved with a life policy, it was necessary to clearly show why this third life was on the policy. Usually this was an investment policy with an element of life cover. The third party would therefore have access to encash the policy once the first two had passed away. Often this was to have funds readily available to meet taxes. but this may not have been the case here as you say they refused to take any action to mitigate taxation.

Sam