23rd October 2018
Why do we get Life Insurance? It is, of course, to protect and provide for our loved ones and family in the worst case scenario. The value of writing your Life Insurance into trust as a Contractor is that your family could avoid inheritance tax and receive the maximum amount of funds possible.
Currently, if you were to die, the value of your legal estate (property, money and possessions) would be calculated and, anything beyond a £325,000 threshold would be subject to inheritance tax at 40%.
If you have a ‘normal’ Life Insurance policy, the value of your cover will be included in your legal estate, as an asset.
In order for your family to access the funds from your Life Insurance policy, they would also have to go through a process called ‘probate.’ Probate is a legal process, according to an individual’s will, where their debts are cleared and assets distributed. In the UK, this process takes an average of 6-9 months. If there is no will, this process can take even longer, leaving your family in a potentially distressing financial situation. Which is why setting up your Life Insurance into trust is a good point to review your will and ensure that it is set up in the way you want it to be.
A trust is a way of managing assets and, in this case, is when an asset is set aside for a particular person, or group of people (the beneficiary/beneficiaries). A Life Insurance policy can be set up into trust to ensure that your loved ones get the whole sum you wanted them too.
If you write your Life Insurance policy into trust you could avoid paying inheritance tax as the value of your cover is not included in the calculation of your legal estate. This is if the value of your Life Insurance policy would have tipped your assets over the threshold.
Even if you are still above the inheritance tax threshold, your Life Insurance policy won’t be included as a taxable asset – meaning that your family will receive the full amount you were intending them to.
More than that, if your Life Insurance is written into trust, your family will avoid the probate process, and can access the money a lot quicker. Usually, all that is needed in order to access the funds is a death certificate. This means that, in a truly painful time, the challenge of finances won’t be another thing your family have to deal with.
It also allows for greater control over the money paid out as a result of your policy, as you are allowed to specify, when it comes to a trust, how the funds are paid. As an example, you may not want a child to have access to the funds until they are 21.
The great news is that putting your Life Insurance into trust doesn’t cost you any more than an ordinary policy. More than that, with a Relevant Life Insurance policy, placing your policy into trust is mandatory – so you save tax while you’re paying for your cover (it’s paid for by your business) and your family save tax in the long run too!
With all of that in mind, have a conversation with one of our expert advisers to see if it makes sense for you.
All content is accurate at the time of publication
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