Putting life policies in trust - it's common sense but not common practice. If the experience of other companies is anything like our own, less than 10% of life policies are written in trust. And yet the need is greater than ever.
With the exceptions of 'life of another' and mortgage policies (particularly those that are assigned to the lender), the vast majority of term policiesshould be under trust to ensure:
- speed of claim payment – there is no need to wait for a grant of probate (or confirmation in Scotland). Typically obtaining probate can take six months or more.
- meeting client's personal wishes – ensuring the money goes to the right person
- Inheritance Tax (IHT) effectiveness – minimising the amount that ends up with the taxman. A life policy not written in trust actually increases the value of the estate for IHT purposes.
For advisers, trusts provide an obvious opportunity to demonstrate real added value. A rival may promote life assurance at an apparently cheaper price, but if £40,000 of a £100,000 sum assured ends up being paid as IHT has the client really been well served?
There is a growing public awareness of IHT, and the Chancellor’s recent inheritance tax threshold rise has failed to impress the public with almost eight out of ten people claiming the tax on death is still grossly unfair, according to research we commissioned in March this year.
Rocketing house prices over the past decade have seen millions more drawn into the IHT net. So despite the rise from £263,000 to £275,000, nearly seven out of ten people (67%) still believe the tax threshold on inherited wealth should be set at a far higher level. IHT is currently paid at a flat rate of 40% above the threshold, irrespective of how much wealth a person has. However almost eight out of ten people (76%) think the current IHT system should be reformed, preferring a banded system similar to income tax.
In fact the majority of people would like to see IHT abolished on first homes altogether. Perhaps unsurprisingly, more than six out of ten (64%), questioned in the poll, said they should have the right to pass on the total value of their main abode to a beneficiary without paying tax. More surprisingly, despite most people believing that IHT is unfair, less than one in ten (9%) seek professional financial advice in order to minimise their family’s liability to pay IHT in the event of their death.
Booming house prices over the last few years have been great news for homeowners but they are pushing millions of homeowners towards the IHT trap.
IHT starts on estates worth over £275,000 and research (NOP World for Halifax Financial Services) shows that somewhere near 2.5 million homes in the UK are worth more than that. So simply owning a house means that you could have a liability to IHT. It’s estimated that every minute another 2 families have fallen into the tax trap without realising it.
And this isn’t just of problem for wealthy homeowners. Average house prices in areas such as Oxfordshire, Buckinghamshire, Surrey and Hertfordshire would all fall foul of the current £275,000 threshold. Other areas of the country are catching up fast with the gap in prices narrowing between for example parts of Cheshire and the South East.
Meanwhile in the heart of commuter belt in Esher, Surrey the average house price is £416,000 which alone could give a tax bill of over £56,400. In Kensington and Chelsea, the average price is £670,000 which could give a tax bill of over £158,000.
And remember that this is based purely on house prices – most of their other assets will contribute to the IHT trap – house contents, car, investmentsincluding PEPS and ISAs and life assurance policies not written under trust.
Across the country there was some £2.5 billion paid in IHT last year. The average bill was around £78,000 (based on 32,000 tax payers).
IHT represents an obvious opportunity for IFAs to differentiate themselves from non-advice distributors. Proper IHT planning requires a fund of knowledge and insight but there are basic steps that non-specialists can look at such as putting existing and new cover in trust.
Clearly there are many mitigation strategies, some insurance based, many not. These will include reducing the liability or planning to meet the bill. Making a will is the obvious first step in effective planning to ensure that your estate is distributed according to your wishes and any liability to IHT is minimised. If you don’t have one, you have unusual family circumstances or you aren’t married you might find that some surprising people could benefit.
Secondly you can make provision for inheritance tax by setting up a life assurance policy under trust. This keeps the money from the policy outside the estate for IHT and beneficiaries could use it to pay any tax bill without having to wait for probate.
Thirdly, if you can afford to do it, you can reduce your estate by gifting assets to your family and friends while you are still alive. There are a number of gifts that you can make that are exempt from inheritance tax
- gifts between married couples
- gifts of up to £3,000 per annum, to anyone else
- 'small' gifts of up to £250 per person to any number of individuals
- certain gifts in consideration of marriage
- gifts to charities, political parties
Then there are Potentially Exempt Transfers which are free from IHT if you live for 7 years from the date of the gift. There are clearly other mitigation opportunities beyond the scope of a brief article.
On-line trusts – signature free
Trusts are seen as complicated and time consuming, and therefore in too many cases, are ignored. But they needn’t be. On-line submission and underwriting has revolutionised the processing of life assurance business and it’s now possible to set up a trust on-line. If you want to write a Flexible Trust under the Law of England and Wales, with our own system it’s now possible to do this completely on-line at the time of inputting a case. (For trusts written under the Law of Scotland, it is necessary to obtain a signature and have it witnessed, to evidence delivery).
How can a trust be established without a signature? Under the law of England and Wales, there is no need for a signature, or indeed writing of any sort to create a valid trust. Our online process ensures that the trust is valid by satisfying the following requirements of trust law:
- Certainty about the client's intentions when setting up the trust (the terms of the trust).
- Certainty about what is to be held in the trust (details of the life policy).
- Certainty about who is to benefit from the trust (the names of the client's beneficiaries).'
What is important is for the client and the trustees to know (and if necessary be able to prove later on) the exact terms of the trust which has been created. We enable them to do this by issuing a copy of the full trust provisions with the policy document.
We believe that more needs to be done to encourage greater use of trusts andanything that can be done to ease the process has to be a good thing.
