Single Parent Reserving Critical Illness Cover
If you are a single parent and you have a death or earlier critical illness policy, you may wish to use a split trust to reserve the payout for yourself in the event you have a critical illness.
If you are a single parent, with no partner of spouse to name as a possible beneficiary, you are faced with a difficult choice. You need to choose whether to put you policy in trust or not.
Not placing your life and critical illness policy in trust:
You could choose to not place your policy in trust. If you took this decision, and assuming you had also made a will, leaving everything to your children, and assuming your estate on your death (including the value of your policy, as it would not be in trust) would be below the nil-rate band then your child or children could inherit everything with no Inheritance Tax.
However, if your estate was over the nil-rate band, your children could lose 40% of your insurance, as the full payout from the policy on your death would be included in your estate.
Placing your life and critical illness policy in trust:
If you have a death or earlier critical illness policy, you obviously should not place all the benefits, including the critical illness benefit, in a trust from which you cannot benefit.
This would mean you could not have any money if you suffered a critical illness.
A better option would be to use a split trust, placing the death benefit in trust for your children and reserving the critical illness benefit for yourself.
If you do this and if you have a critical illness, you can receive the policy proceeds, as you have not given up the payout in the event of a critical illness.
If you die, from a 'non-critical illness related' cause, (for example, a road traffic accident), your children may be able to receive the policy proceeds free of any liability to Inheritance Tax.
However, if you were to die from a 'critical-illness related' cause, (heart attack, cancer, stroke, etc.) it is likely (even if you die before making a claim) that the policy proceeds will be counted as part of your estate by HM Revenue & Customs and therefore be potentially liable to Inheritance Tax.
Nevertheless, if you use a 'split trust' in the above manner, at least your children have the possibility of being able to receive the payout free of Inheritance Tax; whereas if your death or earlier critical illness cover is set up without using a trust, the proceeds will, in the event of your death, definitely form part of your estate and therefore be potentially liable to Inheritance Tax.
If you wanted to make absolutely sure your children would be able to receive money from a life insurance policy free of Inheritance Tax, you would need to do two separate policies, a 'death-only' policy in trust (not a split trust) with your children as beneficiaries; your children will receive the proceeds from this policy free of Inheritance Tax.
If you wanted critical illness cover, you could take out a second policy, paying out on your death or earlier critical illness; and could place this policy into a split trust, with the above provisos on this policy about the possibility of Inheritance Tax.
