Putting life insurance in trust for IHT purpose

lake888

My husband and I do not have any children.  Therefore we can only make use of the combined nil rate band of £650000 when passing the estate to our nephew and niece when we die.  I have heard a lot about putting life insurance in trust as the pay out is not included in the estate and we want that money to be used to pay IHT before probate granted.  Are there any drawbacks in doing so?  

Marcon

Masses of reliable and straightforward info available if you google eg https://www.unbiased.co.uk/discover/insurance/life-insurance/what-is-life-insurance-in-trust-and-should-you-put-yours-in-one

MyRealNameToo

lake888 said:

My husband and I do not have any children.  Therefore we can only make use of the combined nil rate band of £650000 when passing the estate to our nephew and niece when we die.  I have heard a lot about putting life insurance in trust as the pay out is not included in the estate and we want that money to be used to pay IHT before probate granted.  Are there any drawbacks in doing so?  

Is this a whole of life insurance? Assuming it's the more normal term insurance, what's the plans when the term comes to an end?

Others are probably more experienced with life insurance than me but you'd normally put it in trust to avoid it being part of your estate and it passes directly to the beneficiaries but you are effectively saying you want your estate to be the beneficiary given you want it to be used to pay the IHT.

In practice you're more likely to just be giving it to your beneficiaries and its up to them if they keep it as cash and something else in the estate pays for the IHT or if they use it for that rather than having to sell the home or whatever. 

SadCodeMan

Two different points I guess (but also linked)

Although the strict view is that the IHT is paid by the estate, the practice is that you are not infrequently caught in a loop that you need probate to deal with aspects of the estate (like selling a house) that would free up the cash you need to pay the IHT bill and you need to pay the bill (or make an arrangement with HMRC of how you will do that) before you can get probate.

There are definitely aspects of inheritance planning which would involve a life insurance policy and sensible reasons for doing it. When you do, it is not infrequent that the policy would be written in trust.

There are also other IHT type things of this sort like on-shore (or off-shore) bonds written in trust which can act like a life insurance policy where you would prefer to take on the longevity risk but still like the other aspects of the structure.

I am not saying that the life insurance is a sensible thing to do or that it isn't (I don't know enough to say) but if it is a good thing to do then I don't think there is a drawback to writing it in trust and probably the opposite. (With the caveat of the drawbacks refered to in the excellent link from Marcon)

poseidon1

lake888 said:

My husband and I do not have any children.  Therefore we can only make use of the combined nil rate band of £650000 when passing the estate to our nephew and niece when we die.  I have heard a lot about putting life insurance in trust as the pay out is not included in the estate and we want that money to be used to pay IHT before probate granted.  Are there any drawbacks in doing so?  

My post of 20 August on the revived thread below may offer some headline points that may apply to your circumstances - 

https://forums.moneysavingexpert.com/discussion/comment/81604114#Comment_81604114?utm_source=community-search&utm_medium=organic-search&utm_term=life+insurance+and+iht

Depending on your respective ages, cost will be the biggest drawback.

lake888

MyRealNameToo said:

lake888 said:

My husband and I do not have any children.  Therefore we can only make use of the combined nil rate band of £650000 when passing the estate to our nephew and niece when we die.  I have heard a lot about putting life insurance in trust as the pay out is not included in the estate and we want that money to be used to pay IHT before probate granted.  Are there any drawbacks in doing so?  

Is this a whole of life insurance? Assuming it's the more normal term insurance, what's the plans when the term comes to an end?

Others are probably more experienced with life insurance than me but you'd normally put it in trust to avoid it being part of your estate and it passes directly to the beneficiaries but you are effectively saying you want your estate to be the beneficiary given you want it to be used to pay the IHT.

In practice you're more likely to just be giving it to your beneficiaries and its up to them if they keep it as cash and something else in the estate pays for the IHT or if they use it for that rather than having to sell the home or whatever. 

It is a whole of life policy payable upon second death that we want to set up and put in a trust.  The sole purpose is to enable the beneficiary of the policy (who is also the executor of our will) to pay IHT before applying for probate.  I hope this is a quicker and more direct process to get some money out of the estate.  

lake888

The thing that I am concerned in appointing my nephew/niece as executors of my will is that they may not have enough money to pay IHT before applying for probate (to deal with other assests and selling house etc).  Am I correct in thinking that once upon the second death, the trustee can make a claim on the life policy and get the pay out ready for settling IHT before the probate?

MyRealNameToo

Yes, the life policy will typically pay out much quicker than the probate timescales and as its in trust it doesnt form part of the estate. It would be your "niblings" choice what they do with the money as it's been left to them. 

Hopefully you understand how the whole of life policy works in later life, many seem to buy without realising the premiums are reviewable and get a nasty surprise when the letter arrives 10 years later saying they either need to increase their premiums or reduce the cover if they want it to continue. 

lake888

May I ask which type of trust is more suitable to hold the life policy in our case, discretionary or absolute?  I have also read about exit charge and 10 year anniversary charge on trust and just want to understand whether the type of trust chosen would make a difference.

poseidon1

lake888 said:

May I ask which type of trust is more suitable to hold the life policy in our case, discretionary or absolute?  I have also read about exit charge and 10 year anniversary charge on trust and just want to understand whether the type of trust chosen would make a difference.

Undoubtedly an absolute trust. Here the policy has a single task which is to pay IHT ASAP on behalf of the beneficary the estate 

Discretionary trusts are for funds to be tied up for many years and distributed over the trust period at the trustee's discretionary to a class of beneficiaries which might include future unborn. Such trusts have no part to play for your specific requirements.

lake888

poseidon1 said:

lake888 said:

May I ask which type of trust is more suitable to hold the life policy in our case, discretionary or absolute?  I have also read about exit charge and 10 year anniversary charge on trust and just want to understand whether the type of trust chosen would make a difference.

Undoubtedly an absolute trust. Here the policy has a single task which is to pay IHT ASAP on behalf of the beneficary the estate 

Discretionary trusts are for funds to be tied up for many years and distributed over the trust period at the trustee's discretionary to a class of beneficiaries which might include future unborn. Such trusts have no part to play for your specific requirements.

I understand that beneficiary cannot be changed under an absolute trust. What if the beneficiary pre deceased us?