Wills – Writing a Will is the only way to ensure your assets pass to those who you wish to benefit. If you do not make a Will the laws of intestacy apply. Hence, the courts will decide where your assets go. Without a will there is no assurance that your wish will be granted. Your partner will not automatically inherit all of your estate. In addition, common law partners may not receive anything. Minor children could be taken in to care while guardians are appointed.
Trusts – A trust is an arrangement, defined by law, where someone or a group of people are made responsible for assets for the benefit of another group of people. The people assigned to administer the trust are known as trustees, and those benefiting are known as beneficiaries. The person who sets up the trust is known as the settlor. The assets are then held in the trust to be released at the desired time.
Advantages of using trusts for life policies
Reduces inheritance tax liability
By paying your life insurance benefit directly to the recipient, your policy is no longer considered part of your estate. Current inheritance tax laws state that any part of your estate which is over the value of £325,000 has to be taxed at 40%. Consequently, if you have a house and a life insurance policy, the total value of your estate can quickly exceed this limit. By writing your policy in trust, you could potentially avoid your estate being valued at more than this amount. Thereby avoiding the need for your family to pay the high rate of inheritance tax.
Avoids delays due to probate
Beneficiaries receive the policy proceeds in the event of death of the life assured. They won’t have to wait for probate to be granted, which can take months or even years. By writing your policy in trust, your family will be able to access the money quicker. Therefore, it will help them deal more effectively with unexpected expenses such as funeral costs or the loss of your income.
Keep control of your policy
Writing your policy in trust, ensures the money goes to the people you intended it for, at the time you intended. For instance, you wish to leave all or part of your insurance money to your children. You can ask the trustees to keep control of it until they turn 18, or at whatever age you specify. You can write any asset in trust, including your life insurance policy. Putting it into trust, will make it the property of your beneficiaries right away. Although they cannot gain access to the money until after your death. The trustee is usually your life insurance company. They will retain the money until somebody claims after your death. At which time it will be paid directly into the beneficiaries’ bank accounts.
A split trust is normally only used with a life and critical illness policy. Any payments from the policy which are due while your client is alive (from critical illness cover) will still be paid to them. But any payments that are due when they die (from life cover) will be held in trust. A Split Trust should only be recommended if a client takes out a life policy with critical illness cover.
You should consider creating a Split Trust:
If you wish to gift the Death Benefit payable under your policy to your chosen beneficiaries.
But you wish to keep the Critical Illness/Income Protection Benefits for yourself.
You should consider using the Discretionary Trust option:
If you wish to retain flexibility over the choice of the ultimate beneficiaries. For example, the persons who will receive the Death Benefit under the trust.
You should consider using the Absolute Trust option:
If you are certain who is to benefit from your gift. For example, you do not wish to retain any flexibility over the choice of your beneficiaries.
What are the advantages of placing assets into Trust?
Blood Line Planning ensures that your assets reach the right beneficiaries, rather than ending up in the wrong hands. Your children/grandchildren’s future inheritance can be at risk from a number of issues. The type of planning is very much dependent on individual requirements and the value of the estate.
You can lose your hard-earned money from any future divorce, settlements, creditors and taxation if not protected. Assets placed into Trust are not formally classed as part of your beneficiary’s Estate. Therefore, when placed into Trust your beneficiaries will be protected from any future divorce settlements, bankruptcy proceedings, creditors liabilities and taxation.
Protect your assets from marriage after death
Putting your assets into Trust removes the risk of your own children being disinherited if your surviving partner enters a new marriage. When you set up a Trust, your assets cannot be taken into the marriage, therefore your children will be protected. At the same time your surviving partner can still access the assets in the Trust.
Reduces tax payable
Trusts are also subject to Tax. However, appropriate management chosen by your Trustees can reduce any amount due substantially. Particularly the impact of inheritance tax on future generations. Trusts have been instrumental in mitigating tax since the Medieval times. They were initially created for the Nobility and wealthy landowners to avoid paying taxes. In this modern era, many people now look to using Trusts as a means of mitigating tax, which would otherwise be payable.
The inheritance tax threshold is the amount above which inheritance tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it. Tax will only be applied if the value of your estate is above the current threshold. Also, it is only payable on the excess above nil rate band. The rate at which Inheritance Tax is charged is 40%. Not all income is taxable – and you’re only taxed on a ‘taxable income’ above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill. In some cases, it means you have no tax to pay.
Protect your home from being sold to pay for care fees
The strategic use of Trusts can protect your home and assets from being sold to pay for care fees.
By placing your assets into Trust, they no longer form part of your estate. This means that if care is required, your assets will not be calculated as part of means testing. By declaring assets in this way, it enables you to continue to benefit from them but ensure that they are safeguarded for your loved ones.
Assets placed in Trust (including your family home) could be protected from being sold to pay for care home fees. Capital limits are used to assess a person’s ability to pay for care. The Local Authority will pay for all your care if your estate is worth less than £14,250 at the time you are admitted to care but if your Estate is valued over £23,250 you are liable to fund for your own care even if this involves selling your family home. According to PayingForCare, a report by healthcare specialists Laing & Buisson in 2013/14) depending on where in the UK you live, care homes can cost an average of: £29,270 per year for a residential care home, or. £39,300 per year if nursing is required.
* Wills and trusts are not regulated by the Financial Conduct Authority