Whole of Life policy not put in trust, IFA liable?

LilyJ89

Hi all,

I believe the vast majority of advisory firms are now sharp on making sure all life assurance policies, and especially whole of life policies for IHT purposes, are written under an appropriate trust arrangement at the same time the policy goes in force or ASAP afterwards?

I know of a firm who carelessly left the writing of a discretionary trust for a number of months before finally sending it to the clients to complete. It has me wondering if in such a circumstance, whether the IFA firm be liable for the amount of tax due if the client was to die in the time between the policy start date and the eventual completion of the trust?

For example if a joint life Whole of Life policy was written to cover a 600K IHT liability and the married couple who act as the settlors of the trust were to die in a car crash, would the IFA firm be liable for the full circa £240K tax bill?

Luckily the policy I touched on above is now under trust with no issues, it just got me thinking about if some of my colleagues would be covered in case of a mistake by the IFA firm. I believe the firm put it down to human error as to why the trust documents hadn't been sent out but I don't know whether the client, or the clients beneficiaries paying the tax bill, would have to suffer for that!??

Just after some piece of mind haha.

Thanks, Lily x

dunstonh

I believe the vast majority of advisory firms are now sharp on making sure all life assurance policies, and especially whole of life policies for IHT purposes, are written under an appropriate trust arrangement at the same time the policy goes in force or ASAP afterwards?

The majority of policies are not required to be placed in trust. Where it is appropriate, it should be recommended. Where it isnt, it shouldnt be.

I know of a firm who carelessly left the writing of a discretionary trust for a number of months before finally sending it to the clients to complete. It has me wondering if in such a circumstance, whether the IFA firm be liable for the amount of tax due if the client was to die in the time between the policy start date and the eventual completion of the trust?

Depends on the objective and the reasons. Also can be influenced on whether it is an off-the-shelf trust or a solicitor arranged one.

However, if the question is purely hypothetical and the loss event has not occurred than no they are not.

it just got me thinking about if some of my colleagues would be covered in case of a mistake by the IFA firm.

If it was meant to be in trust from the start and the loss event happened and the IFA was at fault for not setting it up within a reasonable timescale than upto £150k compensation is possible.

LilyJ89

Thank you for your response Dunstonh, much appreciated.

I have another query about trusts that is bugging me but has nothing to do with compensation, sorry if slightly off tangent but I get that you're an expert on these matters!

With relation to term assurance, lets say there is a married couple who both take out single life-only policies for £100,000 to cover a mortgage - subsequently one of them dies but the policy was never in trust. Would the surviving spouse be able to inherit the full £100,000 to pay off the mortgage without some of the deceased's nil-rate band being used up, or would only £225,000 of the nil-rate band pass on to the spouse (assuming no other assets using up nil rate band) if the policy had not been written in trust?

Really appreciate your insight.

Lily

dunstonh

With relation to term assurance, lets say there is a married couple who both take out single life-only policies for £100,000 to cover a mortgage - subsequently one of them dies but the policy was never in trust. Would the surviving spouse be able to inherit the full £100,000 to pay off the mortgage without some of the deceased's nil-rate band being used up, or would only £225,000 of the nil-rate band pass on to the spouse (assuming no other assets using up nil rate band) if the policy had not been written in trust?

There is no IHT between spouses and it doesnt use up any of the nil rate band. No need for trusts.

You wouldnt normally do single life policies on a mortgage as it only needs to be paid off once. So, joint owner, joint life, first death would suffice. If there were single life policies (and i emphasise that you wouldnt do that) then you could write them on life of the other (owner is spouse 1 and life assured is spouse 2 and vice versa on the other plan).

Chris_Pollard

Completely agree with dunstonh re the establishment of policies specifically designed to repay a mortgage on death. However, there are many instances where two single life policies will be arranged to cover one mortgage. This could be cost effective, but also with regard to policies including Critical Illness, this might mean a larger payout should there children's cover (which is generally standard).

If there is a death claim on a single life policy the insurer will only pay the proceeds when they are satisfied that the party to whom they pay is legally entitled to the monies. If they fail to do this they may end up paying twice. Often they will insist upon the legal personal representatives submitting proof they now "own" the policy and are entitled to the proceeds. If there is a Will, this is called a Grant of Probate, or no Will, a Grant of Representation. All possessions, assets, monies, insurance etc owned solely by the deceased will form part of their estate and they may, or may not, be subject to IHT.

The process of obtaining a Grant will take considerable time and it will only be issued once any IHT due is paid. I believe around 13 weeks is typical, and it can take longer where there is no Will, especially if there are others claiming entitlement.

If policies were not set up in the way dunstonh suggests, existing policies can be amended. They can be placed in trust, or simply assigned to the other spouse or jointly to overcome this issue.