A simple but often overlooked tool by which you can shelter assets from Inheritance Tax (IHT) on your death, maximise the pay-out received by your loved ones, and avoid lengthy probate delays is by putting life insurance in a trust (known as ‘writing life insurance in trust’).
A trust is a legal arrangement which takes ownership of assets (in this case a life insurance policy). It has trustees whom you can choose (e.g. family members, friends or professional persons). The trustees hold the trust assets for the benefit of your chosen beneficiaries (e.g. your family).
You can decide on the type of trust which is most suitable for you. For instance, this could be a trust for specified individuals in fixed shares, or one which is for a group of potential beneficiaries (enabling the trustees to pass the assets to the most appropriate person(s) after your death, taking into account the circumstances at that time and any wishes you may have left).
Provided life insurance has been written in trust, this should mean that when the policy proceeds are paid out they will be free from IHT (subject to exceptions in some circumstances). This simple step could provide a significant tax saving for your beneficiaries after your death.
Furthermore, the policy proceeds could be paid out as soon the death certificate is available, without needing to wait, potentially months, for probate to be granted. This means that the funds could be readily available after your death to pay any IHT due on your estate (an increasingly valuable benefit in these days of high-interest rates, where borrowing money to pay IHT can be an expensive business).
Indeed many policies are written in trust for this key purpose, i.e. to provide a speedily available pot of IHT-free funds which could be used for the payment of tax on death. You could tailor the amount of life insurance so that it is the right amount to cover the likely IHT liability on your death. If the funds paid out are more than required to cover the tax liability, any surplus funds could be used by the beneficiaries as they wish.
An additional benefit is that the money paid out from the policy would go straight to your chosen beneficiaries, rather than being available to your executors to pay your debts or meet the costs of administering your estate, for instance.
If you are not married or in a civil partnership, having life insurance in trust for the benefit of your partner could be a particularly important step to ensure that they will have quick access to the funds they may need after you have gone.
Whilst life cover can be arranged so that the policy lasts for your whole life, it is also possible to arrange insurance for a specific term (e.g. seven years in order to cover a potential IHT liability in the event of you failing to survive seven years from making a lifetime gift).
Many life insurance companies provide standard trust deeds free of charge, or if your affairs are more complex it may be appropriate for a bespoke trust deed to be drafted by a solicitor which is tailored to your particular circumstances.