There are 3 key benefits with regards to writing your life insurance in trust:
- Avoid (or minimise) 40% inheritance tax (IHT)
- Avoid the probate process
- Have better control of your policy
This could really benefit your loved ones financially after you're gone. Let's look at each of these benefits in more detail.
1) Avoid or reduce 40% inheritance tax (IHT)
In the UK, if your estate exceeds £325,000 (if you're single or divorced) or £650,000 (if you're married or widowed) it's subject to 40% inheritance tax.
If not written in trust, the value of your life insurance forms part of your legal estate. If you own a property and a healthy life insurance policy, many UK estates can easily exceed this threshold.
For example, if your house is valued at £600,000 and your life insurance is worth £125,000, then your total estate would be valued at £725,000.
In this instance, you would be subject to £160,000 inheritance tax, (40% of the £400,000 above the £325,000 threshold).
Writing your life insurance in trust detaches the policy from your estate, meaning it's paid directly to your beneficiaries and therefore not subject to inheritance tax.
You may think your estate could never exceed the threshold, but, remember it includes any savings and possessions you have, as well as your property and life insurance policy.
Also, large assets like properties, are likely to increase in value over time. So, if you set up your life policy 20 years ago, your home is probably worth much more now.
According to Zoopla, house prices in England increased +271.27% in the last 20 years. In 2017, the average cost of a house in the South East was £415,084 and £671,047 in London.
2) Avoid probate
Probate is the legal process which confirms that your executors are in the position to administer your estate.
The majority of estates in England & Wales take around 6 to 9 months for beneficiaries to receive their inheritance.
This process can be lengthy, and your loved ones will not be able to make a claim until probate has been granted.
Writing your life insurance in trust detaches it from your estate meaning a claim can be filed as soon as the death certificate is produced.
Generally speaking, funds from a policy in trust are received within just a few weeks and are then available to finance expenses such as your funeral.
In contrast, if your policy is not in trust and the estate has to file for an (estate) tax return, there's no will or there's conflict between beneficiaries, this can make probate even more difficult.
On occasions taking months, sometimes years.
3) More control over your policy
If your policy is not put in trust, the pay out funds could be forced to pay off outstanding debts, rather than going to your loved ones as intended.
Writing your life insurance in trust allows you to take more control and specify who you wish to receive the pay out, when and how you want it distributed.
For example, if you have young children, writing your policy in trust also allows you to instruct your trustees to keep control of the funds until they reach a certain age (for example, 21).