Most advisers are aware of the advantage of putting life assurance in trust.
Just as a quick reminder, the benefits include:
1. The money is likely to be paid out much quicker. The life insurance company only needs to see the death certificate if they are paying into trust, whereas if they are paying to a named individual or into the estate of the deceased they will need to see the grant of probate or letters of administration.
2. If the money is in trust, your clients can have greater certainty that it will be used exclusively the benefit of their loved ones. Once it is in trust it is not technically theirs, and therefore cannot be taken away by creditors, ex-spouses etc.
3. It will minimise inheritance tax. If your client’s estate will exceed the nil rate band once the life insurance proceeds are added, by putting the policy in trust there will be no inheritance tax on those proceeds.
It is therefore perhaps surprising that so few policies are written in trust. I have come across a statistic that only 10% are in trust. Although I have not been able to trace the source of this statistic it is quite clear that most policies are not in trust, whether that is 90% or 80%. I cannot think of any reason why a single life policy should not be written in trust, yet so few advisers seem to get around to doing this for their clients.
Life assurance proceeds is not the only asset that should go into trust on a client’s death. Really, virtually everything should, with the possible exception of pension death benefits. The latter exception may come as a big surprise to you, as perhaps you automatically set up spousal bypass trusts for pension benefits and are not aware of the tax trap that may now be there. Keep your eye on my blogs for an article about this later.
Why am I saying virtually everything should go into trust?
Let me first give you some more statistics. According to the Office of National Statistics 42% of marriages in England and Wales end up in divorce. You are probably also aware that at least 50% of the new businesses set up in the UK go into liquidation within five years – some commentators put this figure even higher. Around 70% of people now aged 65 are likely to need some form of long term care at some point in their life (I got this statistic from the US Department of Health and Human Services, but the statistics for the UK are likely to be very similar).
What is the relevance of these statistics?
If your clients’ children get divorced their ex-spouses will probably want a share of their assets, and the divorce court will probably agree they should get it. If they have received an inheritance from their parents this will be added to all their other assets when calculating the divorce settlement. But if it has gone into trust it is not their property. They still benefit from it, but they do not own it and therefore it is not taken into account.
If your clients’ children set up a business which goes into liquidation they may well find they have to pay creditors personally. This will certainly be the case if it is a sole tradership, and even with a limited company it is likely they will have given guarantees to the bank. This is not simply the case with a new business of course. There can be many other reasons for someone to become heavily in debt. Whatever the reason for their credit problems, the money in the trust is not their money, and therefore cannot be seized by their creditors.
Long term care is a major issue. If your client’s spouse has died when they need long term care, all their assets including the family home will available for the local authority to use to pay for the care. When the money runs out the care will probably be the same, but will now be fully paid for by the local authority. So the wealth left by their spouse is not used to improve their care, but just to reduce the cost to the local authority. This is wealth that could have been passed down to their children and grandchildren – if only it had been put in trust.
If you are going to help your client set up a proper trust strategy like this it is no good relying on standard trust documents issued by life companies. Your best approach would probably be to enter into a business relationship with a firm of solicitors or a trust company happy to set up the kind of structure I am recommending. Just make sure whoever will deal with it is a STEP member so you and your clients can rely on the advice given.
I hope you have found this article helpful. If so, and especially if you would like to read the blog about the pension death benefits tax trap when it is published, please click here to be alerted to future blogs.