Life Assurance to dodge IHT

dunstonh

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?

Without the trust, the investment bond is useless for estate planning. It will remain in the estate (unless the policy owners are others, in which case it becomes a gift and subject to the 7 year rule).

The IFA can explain and document but at the end of the day the investor makes the decision.

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.

If this was done later then the file wouldnt show that. The file should be a snapshot of the advice leading upto point of sale.

using a single premium investment bond in trust is a legitimate and normal thing to do in estate planning. Normally the IFA would do the lot but it is also normal for trust work to be an additional cost. It appears parents didnt want to pay that additional cost and were going to do it elsewhere.

The serious of events suggests that they may actually have been using a will writer/estate planning company to begin with. They can do the trusts etc but they cannot set the investment bond up. So, they may have just used that IFA to do that part of it and once done, gone back to the estate planner who should have completed the work. The trust itself appears to have never been set up. With the trust, it would have worked and is totally fine. Without the trust it is just another investment within the estate.

SeniorSam

Unfortunately some financial advisers are like lame ducks. They have the bits but cannot make them all work together.

Not all financial advisers have sufficient training to offer inheritance tax mitigation advise, but Trusts are very simple and effecting an investment that is to be written in Trust is no more than completing another form at the time the investment is made.

Sounds like the clients did not want this or the adviser was somewhat lacking in expertise.

Sam

glottalstop

I don't have an issue with the IFA per se, he was delivering the brief put to him. Nor do I think my parents were stupidly ignoring good advice, but perhaps they felt a trust would be restrictive. They probably planned to live a few years longer, gift more and expected an increase in the IHT threshold to reduce the tax burden.

But I do wish the complex nature of this single-premium retirement bond with nominal 101% life insurance in which there were two defined policy owners or beneficiaries and a third life assured who was not an owner was better explained in all the literature. I will try and get access to the whole IFA file and policy details and read through all the finery, perhaps in the nitty gritty of something called a suitability report.

The other post on a similar sounding L&G policy talks about a familiar subject - a penalty for cashing in within 5 years, and that appears to have happened here as well, stupidly within a couple of months of the 5 year deadline. Having been discovered the former executor and the non-tax payer to whom the policy was assigned appear to have been spooked into cashing up in a hurry. Another feature which may have figured in my parents' planning, funds invested in this type of bond apparently would have been outside any means testing if that ever became an issue.

xylophone

But I do wish the complex nature of this single-premium retirement bond with nominal 101% life insurance in which there were two defined policy owners or beneficiaries and a third life assured

Have a look at this - http://www.legalandgeneral.com/library/investments/product-details/SPB_product_guide_post_rdr.pdf

is there a similar booklet for the product your parents used?

The point seems to be

"Naming people other than yourself can be useful if you want the
bond to remain invested to benefit others in the long term and/or after
you die."

However, what is also clear is that while the bond can remain invested after the death of the policy owner(s), it falls into the estate of the last policy owner to die. It would therefore have been necessary for the executor to declare it for IHT purposes.

The executor had the choice of keeping the bond running until the death of the last life assured, who in this case was the executor himself (with income being paid (or not) to the beneficiaries of the estate), or cashing in the bond and applying the proceeds as directed in the will of the deceased.

It appears that the executor chose to cash in the bond and the insurers drew the cheque in favour of the Executor- the money should then have gone into account of the Executor of............

After that, it was up to the Executor to distribute the monies in that account as in the will.

dunstonh

But I do wish the complex nature of this single-premium retirement bond with nominal 101% life insurance in which there were two defined policy owners or beneficiaries and a third life assured who was not an owner was better explained in all the literature.

There are providers that can go to 8 people. Trust work is more complicated. I know SeniorSam says it is not complicated but he is looking at it from an ex-adviser position. The average consumer will not be able to understand trusts. Many advisers do not either and that is why many advice firms restrict who can deal with investments in trust (and the possibility of some muddling their way through and not getting it right).

Also, trusts work if they are processed and handled the way intended at the start. However, its possible for the trust to be broken or the tax efficiency to be lost by a transaction. So, the advice may have been to place the money into the bond and later assign it to another. However, a surrender would prevent the assignment and the benefit of assignment would be lost and handling of the bond would be totally different from a tax and ownership point of view.

Life companies do not like explaining trusts beyond basics as it is an issue of liability. It is not their job. Also, you can use different trusts with their product. i.e. you could use a Canada Life trust document with a Legal & General bond. Or a solicitor could draw up their own trust. So, these things tend to be talked in generics.

glottalstop

Thanks again esp. Xylophone that is so very helpful and goes to the heart of the purpose of this bond - ensuring the value was protected even after death, giving the Executor the opportunity to administer the policy to get the best outcome for the beneficiaries.

The policy proceeds should have been assigned to the Estate and declared to the tax man even if it was kept running. That raises further questions - how do you declare a policy which is still running and may do so for years, when its value is a moving target. After 7 years does it fall outside PET rules eg escape IHT?

The former executor appears to have ignored rules explained to him by the policy company and handled things with the best outcome for himself in mind. The finger pointing now turns to XYZ Wealth Management who advised the former executor in his subsequent dealings with it.

Earlier in their lives my parents I think made trust arrangements with respect to three grandchildren and later on had a difficult time unpicking the arrangements when circumstances changed, which happens.

macca1974

It all sounds very odd to me. An investment bond (which this sounds like you are talking about) has an owner (your parents) and then needs to have "life assureds" connected to it. As has been said, some bond can have up to 8 people attached to it as "life assureds" and often it will be recommended to an older couple to have somebody younger attached to the bond so that it isn't immediately encashed on their death. This provides the executors of the estate the opportunity to maximise the tax planning around the bond (i.e. it can be "assigned" to somebody else without surrender (and penalties) or to somebody who isn't a higher rate tax payer).

The key point is though that being a "life assured" on a bond doesn't denote any ownership of the bond to that person. It still belongs to the policy holder and if they die to their estate.

If they were not in trust then the certainly form part of the estate and should be dealt with by the executors in the same way that any other asset is in line with the will.

If the previous executor wasn't a policy holder and was only a life assured, then they had no right personal right to the bond at any point and it should have formed part of the estate for distribution.

xylophone

The executor was a life assured and a beneficiary of the will of the policy/bond owner. The policy was not written in trust and therefore fell into the estate of the deceased owner.

The executor should have declared the value of the bond at date of death on the estate return for IHT purposes.

He had no right to deal with the policy until probate was granted, presumably when all IHT due had been paid.

At that point, he needed to distribute the estate in accordance with the terms of the will - apparently the estate was to be equally divided between the executor beneficiary and a certain number of others.

If the value of the policy/bond was equal to the legacy due to one of the beneficiaries, presumably it was within his rights as executor to assign the policy/bond to that beneficiary.

As an alternative, he had the right to cash in the policy/bond and distribute the cash proceeds to the beneficiaries in the shares directed by the will.

What appears to have happened is that the executor did not declare the policy/bond on the IHT return, and having obtained probate, first assigned the benefits of the policy/bond to one of the beneficiaries and subsequently encashed the policy/bond, keeping all the proceeds for himself?

It would appear that there were further machinations with money in the executor's account involving the purchase of a council house (at a discount) on behalf of one of the beneficiaries (apparently not fully mentally competent) who had occupied it for a number of years.

The executor seems to have decided that as the whole of the legacy due to this person was not needed to purchase the house (because of the discount), the balance should not go to the beneficiary but rather to himself. (post 15)

It would seem that the court has now appointed a new executor who has appointed an administrator who has recovered money from the executor for the estate and has paid IHT which should have been paid originally.

However, there are still problems to be resolved in finally settling the estate. (post 15)

It would seem that the main offender in all this was the old executor and that if there are penalties to be paid, he should pay them?

glottalstop

That is pretty much it - naming the executor as a life assured did not denote any ownership or rights over the policy. In my view he is pretending that he previously thought he was entitled to the proceeds and realised only recently that was "mistaken".

Actually I'm pretty sure he knew what he (directly or via XYZ Wealth Management) was doing all along. The good test as you suggest is to see whether he accepts personal liability - for any penalty or interest on late payment of taxes, wasted value by mis-timing the assignment and encashment, increasing the costs of administration by not declaring the policy and leaving it to the new administrator to discover it, plus the consequences of denying the full inheritance due to equal benefiiciaries. The question of liability has been put but he wont give a straight answer.

It is not his only "mistake" while executor, you have noted some of the other examples, cheating the tax man and beneficiaries alike. Worse, costs are unstoppable like in a Dickens story towards the point where the Estate is spent up.