Many estate planners are aware of the benefits of having life assurance policies held in Trust as opposed to not, but when it comes to “which” Trust to use, that’s when things can become a little more complicated.
The Life Insurance Provider’s Trust
Scenario 1
Let’s start by looking at Mr Jones. Mr Jones has a life assurance policy he set up to repay his mortgage in the event of his death which was assigned to a Life Insurance Provider’s Trust by his Adviser. The policy is now held outside of Mr Jones’s estate for IHT purposes and is better protected against other threats such as Divorce, Creditors and Remarriage. Later Mr Jones dies unexpectedly and the Trustees use the policy proceeds to pay off the outstanding mortgage on his home. The mortgage amount is duly deducted from the estate as a debt against it, thereby reducing the total value of the estate for IHT purposes.
That’s good advice right?
It may have been considered good advice once, but only if the planning and death of the client happened before 17th July 2013! Since this date, if we used the exact same scenario again then the ‘new rules’ as set in the Finance Act 2013 would apply. This means now that because the Trustees of the Life Insurance Provider’s Trust used the sum assured ‘directly’ to repay the mortgage, this would NOT be considered to be an allowable debt against Mr Jone’s estate and so would NOT reduce its value for IHT purposes.
Scenario 2
Next we look at a different example, that of a typical couple Mr & Mrs Watts, who recently married and bought their own home, which is mortgaged. Part of the advice they received was to take out 2 x single life policies in order to repay the mortgage in the event of either of their deaths. Both policies have Terminal Illness and Critical Illness cover. Again the policies have each been assigned to the Life Insurance Provider’s Trust.
However, in addition to the problems they may have on death as highlighted above, as these policies include both Terminal Illness Cover (TIC) and Critical Illness Cover (CIC) benefits the Life Office Trust could cause even more issues for the clients.
Why?
Life time benefits such as TIC & CIC are often automatically classed as a Retained Benefit of the Settlor (Mr/Mrs Watts) and are held on a Bare Trust for him / her and so automatically become part of their estate’s on pay out. With the majority of policies including a Terminal Illness cover these days, the majority of life insurance provider’s now automatically create a Split Trust for those policies with retained benefits, meaning these assets are held on bare trust and no longer protected from IHT or other threats such as Divorce, Creditors and Remarriage but without the client being made aware of, or understanding this crucial point.
What can be done?
It’s a matter of deciding WHICH Trust is the RIGHT Trust?
The answer is a Trust that is tailored to your client’s circumstances.
Consider the following:
- How much flexibility does the Trust you are recommending actually have?
- Does the Trust have the ability to allow the client to make informed decisions, such as whether they want to retain certain benefits and gift others?
- What can be done if their existing Trust will not accomplish what they want?
- There are almost always options to improve your client’s current position…..
But most importantly………….
- Are you happy to face a PI claim from a disappointed client who has had to pay more IHT than necessary?
At Countrywide Tax & Trust Corporation Ltd we recognise that “one size does NOT fit all” and so we have a compiled a range of Trusts which are specifically designed to cater for every client’s set of circumstances, which will enable them to achieve their aims.
To learn more about how our strategies can help your clients, contact us today and become a member giving you direct access to our team of TEPS and estate planning experts.
This article was submitted to be published by Countrywide Tax & Trust Corporation Limited as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.
