Should I hold my life assurance policies in trust?
If you have, or are planning to set up a life assurance plan on an 'own life' basis, on death the proceeds are added to your estate and inheritance tax may be payable. Potentially, this could mean that the benefits paid out might be chargeable to tax by as much as 40%.
For life assurance plans that have been set up to provide financial security for your dependants rather than pay off a debt, it may be beneficial to put the plans in trust. The possible advantages of this are:
- To pay the benefits out more quickly as the beneficiaries do not need to wait for probate.
- To protect the benefits being paid out from creditors of your estate.
- As the plans are paid out to specifically named individuals or a group of individuals, they should not form part of your total estate value for inheritance tax purposes.
Possible disadvantages to putting life assurance plans in trust are:
Once you have decided who the beneficiaries are to be, changing them may not be an easy process.
Even after you have stated who the beneficiaries of the plan are to be, your executors will have little or no control over the payment of benefits from the plan, even if after your death, in hindsight it would have been better to have paid the proceeds of the plan out to someone else, the executors may not be able to do so.
Setting up a life assurance plan on a 'life of another' basis
As an alternative, it is also possible to set up a life assurance plan on a 'life of another' basis.
For this to be allowed, an 'insurable interest' must exist. Instead of you being the owner of the plan, another individual (such as a spouse or partner that can prove an insurable interest), is the owner of the plan and on death the proceeds are paid directly to that individual. Once again, as the other individual is the owner of the plan, the proceeds do not form part of the deceased's estate for inheritance tax purposes.
Possible disadvantages of setting up a plan on a 'life of another basis' are:
A third party such as a partner or spouse owns the plan. If in the future your relationship with that third party breaks down, the plan may no longer be appropriate and may have to be replaced at a significantly increased cost, (assuming there have been no changes to your health that may make it more difficult to get the cover you are looking for) or you may have to try to get the plan assigned back to yourself which may not be easy to do.
The legal process by which a will is proved, executors are appointed and an estate is settled; it is also understood as the legal process whereby a dead person's estate is administered, debts are paid and assets distributed in accordance with the deceased's instructions.
The fact that the person setting up the insurance plan will suffer a financial loss on the death of the person to be insured. For a policy to be allowed on a 'life of another' basis, the owner/proposer of the plan must have an insurable interest in the person whose life is to be insured.