Life Insurance in a Discretionary Trust (Information)
Due to changes made in the budget of 22 March 2006, the tax treatment of life insurance policies in trust changed for policies placed in trust on or after that date.
This section looks at the treatment of a life insurance policy placed in trust on or after 22 March 2006.
Putting your cover in a trust means there will be NO INHERITANCE TAX on the payout.
(This is with the exception of the possibility of a very small tax liability arising if the trust has a value during the 24-hour period of a 10th anniversary,)
LIFE INSURANCE NOT IN TRUST?If your life insurance isn't in trust, the payout in the event of a claim will form part of your estate. If you're married, and have made a will, any assets you leave to your spouse, including your life insurance, will be free of Inheritance Tax. If your spouse doesn't survive you, the payout from your life insurance will be liable to Inheritance Tax, and your children could lose 40% of the payout. |
Discretionary trust taxation is completely different to that of a pre-22 March 2006 IIP Trust.
A discretionary trust, hereinafter referred to simply as 'the trust', is set-up by you, as the settlor.
You appoint trustees, who the control the trust funds, and choose a range of beneficiaries, any of whom can be paid or lent money, at the trustees' discretion.
The classes of beneficiaries cannot be changed once the trust has been set up. However, if an all-inclusive phrase has been included, other individuals may benefit. For example, a wording (concerning who may benefit) such as: 'Any person nominated in writing to the trustees by the settlor during the settlor's lifetime, but always excluding the settlor'.
In the event of the death of any one or more of the beneficiaries, no Inheritance Tax liability will arise.
Once a policy has been placed in trust, the insured person cannot demand that any one beneficiary or group of beneficiaries get money from the trust in the event of their death, however, he or she can leave a 'statement of preference' in their will.
It is vital that you pay the premiums of your life insurance in trust from a bank account in your sole name and under no circumstances, unless the policy is joint-life second death, from a joint account.
The premiums for a life policy in trust are highly unlikely to be liable to Inheritance Tax; as they are almost certain to be covered by at least one of the available exemptions.
If mortgage life cover is placed in trust it can reduce any liability to Inheritance Tax.
It is extremely important that you do not reserve policy benefits for yourself.
With a few points to be aware of, a death or earlier critical illness policy can be placed in trust.
if a split trust is used, this may give rise to an Inheritance Tax liability. If you are a single parent, however, and have a death or earlier critical illness policy, it may be advantageous to use a split trust to reserve the payout for yourself in the event of suffering a critical illness.
Once you have placed your policy in trust, you need to give thought to appointing additional trustees.
The above section concerns 'family' life insurance planning. The terms 'policy', 'policy proceeds' or 'sum assured' refer; unless otherwise stated, to the payout in the event of death, of a life insurance policy which will never acquire any form of cash surrender or maturity value, and which will pay out money only if an insured event, such as death or critical illness, occurs during the term of the policy.
All references to 'trust' in this section, refer to a discretionary trust, unless an interest in possession, power of appointment trust (IIP Trust) is specifically referred to.
