However, many people are making the mistake of not writing these life insurance policies in trust. This means that any life insurance payouts will be added to the inheritance of your family and could take them above the nil rate band for inheritance tax.
If a life insurance policy is written in trust this will enable the sum to be excluded from the overall estate of the policy holder, freeing it from inheritance tax liability. It also has the ability to speed up payouts, whether or not it would be liable for the extortionate tax.
Recent changes in the law mean that assets worth 300,000 pounds for individuals and 600,000 pounds for couples are the limit before any tax liabilities. Any assets over that amount would be subject to inheritance tax at a rate of 40%.
The latest figures to be released show that over the course of one year, 11,000 insurance policies worth a total of 597 pounds million were subject to inheritance tax. Had all these policies been written in trust, you can be quite sure that inheritance tax would not have been applicable on any of them.
Will reading and distribution of assets can be a notoriously lengthy procedure. This can be put a huge financial strain on the family. With life insurance policies that are written in trust would be paid out immediately, making things a whole lot easier.
Not putting life insurance policies in trust is costing customers millions of pounds every year in unnecessary inheritance tax. Apparently, only 10% of people write their life insurance in trust. Even if you already have a life insurance policy in place, it is possible to easily put it in trust.
Whether you purchase your life insurance over the net, over the phone or through a shop, they should all come with the chance of writing in trust. It seems odd that so few people take up this opportunity. Maybe it is a case of not getting the right advice?
Life insurance comparison websites abound but there is concern that they are not serving the customer well. It has been found that many people will take out the cheapest life insurance but this doesn't necessarily mean that is the one that is most suitable to their circumstances.
The British Insurance Brokers Association have called for the Financial Services Authority to overhaul regulations regarding these insurance comparison sites. They believe that when people check out these sites, they barely take notice of the policy details, just the price. They even take this price comparison as 'advice'. This is a good case of cheapest not always meaning best.
Whatever happened to people taking responsibility for themselves? Surely, if they take out a policy without concerning themselves with the details, they are throwing their money away. Many people take out a life insurance policy with their mortgage as is necessary but instead of shopping around will go with the mortgage providers own insurance simply because it is easier.
Take control, by all means shop around to get the best life insurance deal, but don't take one purely on the cost of the policy because it may not help very much right at the time when it is most needed.
Gordon Brown, Chancellor of the Exchequer, announced in his spring budget that there would be changes made to policy to bring the inheritance tax loophole related to life policies written in trust to an end. The industry quickly realised what this could mean ? and within 10 days of the announcement it was estimated that 4.5 million people could be affected by any changes in policy.
The draft Finance Bill was then published, bringing more details to light which enabled estimates of affected people to fall to 1 million people. In this article, we explain exactly what has been said so far, and what it will mean.
To make it absolutely clear, only the first draft of the Finance bill has so far been released, and it is that that we are commenting on. The legislation has not been passed through Parliament yet and it is possible that the legislation will be turned down at that point. If it does go through, it won't be law until summer 2006, sometime in early July. If the situation does change then we will let you know.
After making the initial budget speech suggesting that ALL life policies written in trust would come under the new law, the government retracted and amended that to all new policies written after the budget date. So if your life policy was written in trust before budget day on 22nd March, then you don't need to worry, your policy will still be exempt from inheritance tax.
If your policy was still in progress and wasn't completed until after March 22nd, then unfortunately you will be subject to the new tax rules, and you may not be exempt from inheritance tax.
The reason why people usually choose to have their life policy written in trust is because the money can go directly to where it's needed, for example to the mortgage provider to pay off the mortgage, or to family members so they can use the tax-free money immediately. The new legislation will not in fact affect these scenarios, because they come to an end with the death of the policyholder. It is only a certain type of trust called an ?inheritance-in-possession? trust that will be affected by the new tax laws. Policies written in trust after 22nd March 2006 will be affected by the new tax laws if both of the following two criteria are met:
?the policy's payout goes over the Inheritance Tax Threshold (IHT) of ?285,000; and ?the policy comes under the definition of an ?interest-in-possession? trust.
Interest-in-possession trusts are used to pay an income to the surviving spouse, rather than give a lump sum payout. The policy pays out a regular income and then, if the spouse dies, it continues to pay an income to the children. There are a number of charges that will now affect these trusts, including:
?a 40% Inheritance Tax Threshold charge when the money is first put into trust; ?a 6% tax charge charged every 10 years; and ?an exit fee.
If the spouse is given the responsibility to have a high level of control over the trust then the taxes can be avoided, but we feel that some people may not be prepared to do this especially if they are in a second marriage and have children from other relationships. One alternative is a type of trust called a ?bare trust? which will not fall under the new legislation, however it does not pay an income for the whole of the policy, as soon as the children reach 18 they receive the full lump sum.
If you are simply buying life insurance to cover a mortgage or to provide for your family in the event of your death, then having your life insurance written in trust is as viable as it ever was. However, this case does highlight the need to deal with a life insurance broker who is completely up to date with the latest legislation, to ensure that you get the best advice and choose the right type of trust for your individual needs.
Both Catherine Harvey & are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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