Life insurance policy payout

itwasntme001

Unfortunately I am looking to put a claim in for one of my parents who is terminally ill. The life insurance policy was written into discretionary trust with me and my sibling being trustees and also beneficiaries (50-50).

The claim form has a section to enter bank details for the payout with just space for one account details. There is no bank account specific to the trust. But the section allows you to enter bank details of a trustee.

Is this how this is done for policies writtern in trust? The payout can just go to one of the trustees who then can distribute to the beneficiaries?

Will there be any tax issues (e.g. trustee's estate for IHT) with this for the trustee receiving the full payout, albiet temporarily? I guess not given legally it is not their money, but the beneficiaries?

Any other issues?

MyRealNameToo

The insurance isnt part of the estate as it's written in trust, only if the trust failed would it instead revert to being paid to the estate. As such there is no IHT considerations as the trust stands.

HappyHarry

As a trustee you should be able to ask the life company to make two payments - one to each of the beneficiaries. The form may ask for only one account but the life company will be used to such requests.

Even If it did have to go to one account then that account owner would not be have the entirety of the insurance claim as part of their estate for seven years, as half the money is not theirs - and so would be ignored for IHT purposes. HMRC are used to such situations. (One of the accountants here may correct me - but my understanding is that half the proceeds belong to someone else so technically would be a debt owed by the account owner).

poseidon1

https://forums.moneysavingexpert.com/discussion/6660864/life-insurance-policy-payout

Suggest you carefully examine the discretionary trust instrument ( not the policy document), which will set out the documented basis for the trustees to excercise their discretion to appoint capital cash to the beneficiaries.

You maybe required to execute an intermediate 'deed of appointment' signed by both trustees directing to whom the policy cash should be paid to within the customary 2 year period after death.

Pending the execution of such a deed ( the insurance company might have a template you can use), the policy proceeds should be placed in an account isolated from your personal account ( suggest you set up a separate personal account for this express purpose). Also bear in mind any interest earned on the policy pay out prior to distribution, may be subject to discretionary trust income tax rather than personal tax.

Remember with discretionary trusts there is normally a broad class of beneficiaries including your own children if you have any. Therefore you also have the option to divert money to your own children from the trust without this ever being treated as a gift from you for IHT purposes. Worth considering if the proceeds would push your own estate into IHT territory or you are already IHT exposed.

poseidon1

Just reviewed a couple of your past posts. Is this policy one of the term policies indicated in the post below?

https://forums.moneysavingexpert.com/discussion/6584192/questions-around-term-life-insurance-and-trusts

If so, will there be cumulative failed lifetime gifts in the last 7 years that might exceed the ailing parent's £325k nil rate band and occassion an IHT charge as a result?

I note in this regard there was past discussion regarding both parents each contributing high 6 figure amounts into bare trusts for grandchildren. If this was indeed actioned, it could be the case that a grandchild's bare trust fund may end up bearing primary responsibility for some IHT resulting from breaching the £325k NRB with no taper relief to mitigate the tax. Some of the policy proceeds may therefore be needed to indemnify that grandchild's bare trust fund in due course.

Hopefully pre-death gifts( if made) were kept within the NRB, but no doubt you have access to expert legal advice on such issues when the time comes.

itwasntme001

https://forums.moneysavingexpert.com/discussion/comment/81934343#Comment_81934343

My terminally ill parent has given gifts in last 7 years totally less than the £325k NRB.

I understand the life insurance premiums are PETs too but adding this to the above mentioned gifts is still less than the £325k. I also understand the policy written to trust has 0 value given it is a term policy. So no PET value there.

So the policy payout would not be used to settle any IHT but instead for potential future IHT on the surviving spouse estate.

The payout as agreed in the trust wording, will go 50-50 to me and my sibling.

itwasntme001

https://forums.moneysavingexpert.com/discussion/comment/81934135#Comment_81934135

Can't see anywhere in the Aviva discretionary trust instrument suggesting the need to do a "deed of appointment". Unless I misread.

In any case who would need to see this deed, Aviva? I will call them to find out more about any requirements.

But presumably, whether a deed needs to be completed or not, can the account for the claim proceeds simply be sent to my personal account and half transferred to my sibling on the same day?

DRS1

If it is a discretionary trust then the trustees have to exercise that discretion. They would usually evidence that with a Deed of Appointment. Until they exercise their discretion any beneficiaries only have a hope of benefiting - they are not entitled to anything.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81934777#Comment_81934777

I attach below Aviva's current iteration of a discretionary trust template for their protection policies -

https://static.aviva.io/content/dam/document-library/adviser/individualprotection/al53003c.pdf

You mention ( I believe wrongly) that you and your sister are the specified named beneficiaries entitled from outset to the trust fund as per box D at page 3. Clearly that cannot be the case otherwise the trust could not be discretionary.

However, you likely failed to read the fine print related to the named beneficiaries, and note they are merely backstop 'default' beneficiaries in the event of there being no formal discretionary appointment of capital to any beneficiaries that form the wider beneficial class by the end of the trust 125 year period. In other words, and as made clear by the Default clause after clause 7 on page 5, your automatic entitlements only occur after the 125 year trust period has ceased and no capital appointments to anyone ( including to yourselves ) has been actioned prior to.

As a result of your unfamiliarity with legal terminology pertaining to trusts you will then have likely overlooked or failed to understand, the trustee powers of capital appointment set out at clauses 5 (a) to (c) at page 5 of this deed.

I happen to know Aviva do provide a template document for appointments of trust capital from standard trusts which I provided to another OP in a similar sceanario, example below -

https://static.aviva.io/content/dam/document-library/adviser/general/gn05011c.pdf

You should check with Aviva to ensure the above deed is current - this version is an all purpose one to be used for non Aviva policies so there maybe a more relevant version. It seems to me that completing an appointment deed in favour of yourself and your sister and providing Aviva with it, should enable them to make payment of policy proceeds direct to you both without you having to receive your sister's share at all.

What I would do in your position, is have the draft deed prepared in advance and ready to execute the day after the passing of your terminally ill parent. Then submit to Aviva sooner rather than later thus hopefully speeding up the process of formally bringing the trust to an end and effecting rapid settlement of the policy proceeds.

Importantly, the trust would then cease 1 day after parent's demise, so any taxed or untaxed interest that Aviva might add to the policy proceeds would belong to you both as of right, and not caught by discretionary trust income tax rates (45%).

Protection policies in discretionary trusts for IHT mitigation purposes is definitely on the increase, so this response to your predicament will hopefully be useful to others who may similarly have trouble understanding what they have elected to administer as a discretionary trustee, and how to properly terminate such arrangements when called upon to do so.

Failing the off chance of obtaining guidance from forums like this, life companies do expect trustees' to take legal advice on their options and obligations if they don't understand the trust documents they are presented with. Your intended course of action fell somewhat short of achieving an effective legal termination of a discretionary trust.

itwasntme001

I spoke to Aviva after your post poseidon1, and they say they only pay directly to a trustee and do not get involved at all who the beneficiaries are as its up to the trustees (at their discretion). I mentioned the deed of appointment form and whether that needs to be sent and they said only if the trust deed changes but after the claim money is paid to the trustees nothing needs to be sent as Aviva do not care who gets the money (after it is sent to a trustee).

So it seems we are over complicating things here and as the other poster above said, it seems fine to just pay the full amount to a trustee, and paid out to beneficiaries at their discretion. Ultimately the money will go to me and my sibling, there won;t be any legal issues with claim for money etc. So we could just complete a deed of appointment and distribute this document to me, my sibling and my parent. But it would also be pointless it seems.

The claim is for terminal illness, not death.