While there are plenty of people out there making arrangements to ensure that their families are provided for when they die, only about 5% take the extra, beneficial step of writing their life insurance into a trust. Many people aren’t even aware that it’s something that you need to do, however, if you don’t, there are consequences and it’s your surviving loved ones that will have to deal with the fallout.
So, What IS a Trust?
To explain why it’s a good idea to write life insurance into a trust, we’re first going to have to explain what a trust is. Essentially, it is a legal policy that’s used for the separation of legal ownership and it’s important for reasons relating to Inheritance Tax (IHT). Your collective assets are taxed when you die and this kicks in when those assets (a.k.a. Your estate) reach a certain level set by HMRC.
Inheritance Tax Can Take a Huge Bite
If your assets exceed a certain amount (currently £325k), anything over that amount will incur IHT at a rate of 40%. And here’s the rub – if you don’t write your life insurance into a trust, your beneficiaries will have to pay IHT on the payout, amounting to what could be tens of thousands of pounds.
When you don’t have your life insurance written into a trust, it forms part of your estate and means that you’re much more likely to break through the IHT threshold. If it’s in a trust, it’s considered as a completely separate entity and it’s not added to your estate’s total value. You might still end up paying some IHT in this scenario, but it’s usually at a much reduced rate.
No Additional Cost
Another reason why writing your life insurance into a trust is such a wise move is that most insurance providers will take care of it for you at no additional cost. It is advisable to obtain legal advice before setting anything up though, because there’s an immutable nature to a trust once it’s been set up. For instance, the named beneficiaries can’t be altered afterwards and there are many other decisions to make.
It’s worth repeating that you should think it through and speak to a legal professional before committing to anything when it comes to trusts, as it can be a complex process to set up and it can be difficult to change.
A Faster Payout For Beneficiaries
When someone is named as the executor of an estate, they have to deal with the probate process and necessary acts like applying for Grant of Representation. This can take quite a bit of time and that’s in cases when the deceased is not considered to be ‘intestate’.
Intestate means that a will isn’t in place and it can lead to delays of up to 12 months before someone is given the authority to deal with the financial affairs of the person who’s died. That’s 12 months before your loved ones will benefit from the life insurance policy you set up to look after them.
A very different prospect faces your beneficiaries if your life insurance is written into a trust, as all that’s usually needed to access the payout is a death certificate. It’s easily the fastest and most convenient method of ensuring that your loved ones get the financial support they need quickly after you die.
The Only Savvy Move
From the information we’ve provided in this blog, it’s pretty obvious that if you don’t have your life insurance written into a trust, your family could really miss out. And the fact that it’s free to set up is just another reason why doing so is something of a ‘no brainer’ for anyone setting up their life insurance.
Unless you’re happy losing thousands of pounds to Inheritance Tax – and why would you be? – it’s the only savvy move and it’s something your relatives will be very grateful about for if and when the time comes. The difference between having your life insurance written into a trust and not is night and day for your relatives, so we’d recommend talking to your insurer to sort it out.
If you’d like to know more about anything discussed here or you’d like to learn more about how to live your financial life in the most savvy way possible, head over to our website www.bemoneysavvy.co.uk now and take a look around.
Should you have any questions for us or you need some help or advice regarding something specific, you can get in touch with our team by calling 0161 537 0555 today. Our team is ready and waiting to help you in any way they possibly can.