Questions around term life insurance and trusts

itwasntme001

Hi,

Parents are applying for term life insurance as single life policies (so two separate policies).  In order to mitigate IHT bill if they were to pass away within 7 years of the large gifts they have made.

Obviously these should be written into trust and it looks like discretionary is the best option given the flexibility (so we can change beneficiaries later etc).

Given parents are in good health and the sums insured are not particularly large very (low 6-figures) there should not be any CLT tax or other tax issues relating to trusts etc.

Beneficiaries would be children/grandchildren and not other spouse.

Questions I have are:

- the provider has advised that the premiums payable by parents should come from single bank accounts as opposed to joint in order to avoid inheritance tax issues.  Wondering what these issues might be exactly?

- since the policies are written to mitigate IHT tax bill potentially, who should the beneficiaries actually be?  On first death, the nil rate band would be used, so not immediate tax liability, but who should the payout go to?  And on second death there potentially would be a bill so presumably any beneficiry can settle the tax bill with HMRC during probate?

- Any other tax consideration to think about, particularly given involvement of trusts?

TIA.

Keep_pedalling

The reason for coming from separate accounts is that paying insurance premiums for someone else can lead to them being subject to IHT.

The beneficiaries if the insurance policies should be those people who are directly effected by the failed PETs. 

I would be cautious about a discretionary trust as there can be expenses and a right pain to manage.

itwasntme001

Keep_pedalling said:

The reason for coming from separate accounts is that paying insurance premiums for someone else can lead to them being subject to IHT.

The beneficiaries if the insurance policies should be those people who are directly effected by the failed PETs. 

I would be cautious about a discretionary trust as there can be expenses and a right pain to manage.

What are these expenses and what is there to manage exactly?

Given the term insurance is on healthy people and on a low 6 figure sum insured, there is nil or at most negligible transfer of value to the trust.  So there would not be any charges or HMRC forms to fill in.  The term is less than 10 years, so no 10-yearly charge to calculate.  On exit and payout, there again will be no charge.  The money would immediately paid out to the beneficiaries so trust will end as soon as the payout is made.

Unless I am missing something?

ankursh12

When using term life insurance to mitigate Inheritance Tax (IHT), writing the policy into a discretionary trust is a smart move, as it keeps the payout outside the estate and allows flexibility in choosing beneficiaries.

Answers to Your Questions:

1. Premiums from Single vs. Joint Accounts: The insurer likely suggests using single accounts to prevent the premium payments from being considered a gift from both parents, which could complicate IHT calculations. Payments from a joint account might be seen as coming equally from both, affecting tax treatment.

2. Choosing Beneficiaries: Since the nil rate band applies on first death, the surviving spouse can use their allowance. On second death, the trustees can use the payout to settle the IHT bill before distributing assets.

3. Additional Tax Considerations: Ensure the policy is set up correctly to avoid periodic or exit trust charges. Comparing options on Policybazaar term insurance can help find flexible plans with trust benefits. Consulting an estate planner is advisable to optimize tax efficiency. ✅