Life Insurance in an Interest in Possession Trust (Information)
Changes were made in the way in which interest in possession, power of appointment trusts are treated for tax in the budget of 22 March 2006.
This section looks at the treatment of a life insurance policy put in trust before 22 March 2006.
An interest in possession trust, or to give it its full title, an interest in possession, power of appointment trust, hereinafter referred to simply as 'the trust' or as an 'IIP trust' is set-up by the settlor
It has trustees, who are in control of the trust funds, and beneficiaries, who can receive money.
There are two classes of beneficiaries, default beneficiaries and potential beneficiaries.
The trustees decide which of the beneficiaries will benefit, and in what proportion.
The list of default beneficiaries can be changed for example, to add children born after a trust has been set-up, but this will change the tax treatment of the trust..
In the event of the death of a default beneficiary, an Inheritance Tax liability may arise. The death of a potential beneficiary will not give rise to any Inheritance Tax liability.
If children are appointed as default beneficiaries, money can still be paid to a surviving spouse, who will benefit from the spouse exemption.
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 very important that the source of premiums for a life policy in trust is the insured person's own single-name bank account and under no circumstances, unless the policy is a joint-life second death, policy, from a joint bank account.
The premiums for a life policy in trust will be potentially liable to Inheritance Tax unless they fall within one of the available exemptions.
If mortgage life cover is placed in trust it can reduce any liability to Inheritance Tax.
It is important that the insured person does not reserve policy benefits for him or herself.
If you have a death or earlier critical illness policy, there are benefits to having this cover in trust, however, care should be taken. if a split trust is used, this may give rise to an Inheritance Tax liability.
If a single parent has a death or earlier critical illness policy, he or she may wish to use a split trust to reserve the payout for him or herself 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.
All of the information given above has 'family life insurance planning' in mind. All references to 'policy proceeds' or 'sum assured' refer, unless otherwise stated, to the payout in the event of death, of a life insurance policy.
All references to 'trust' in this section, refer to an interest in possession, power of appointment trust.
All references to 'the policy' or 'the life insurance policy' refer to any of the various forms of term life insurance, none of which ever acquire a cash surrender or maturity value, and will only pay out money if an insured event, such as death or critical illness, occurs during the term of the policy.
All references to the 'insured person' unless otherwise stated, assume that the insured person and the policy owner are one and the same.
