Life Insurance and Pensions
Life insurance can pay out substantial amounts and so to ensure that it does not impact either the deceased’s estate or the recipient’s estate it should always be assigned to trust. Where it is not assigned to trust, such payouts can create an Inheritance tax liability on an estate that otherwise would not have one. Once in trust the fund will have all the usual protections offered by discretionary trusts protecting against marriage after death, creditor claims, bankruptcy, long term care costs and generational IHT to safeguard the fund for future generations.
Joint life 1st death policies are not IHT efficient in this way as even if assigned to trust they will remain in both parties estates as it is unknown which settlor will die first. Such policies should be re-broke into single policies assigned to each client’s own trusts where possible.
Life cover should ideally be of sums assured less than the Nil Rate Band to avoid incurring periodic and exit charges and so multiple life assurance trusts may be required. A deed of assignment is required per policy.
Where it’s not possible to rebroke a large single life policy with large sums assured it is still possible to be more IHT tax efficient using declarations of trust.
Pensions are generally in trust whilst accumulating, it is post death that various options are available and one option can be an absolute distribution of a lump sum. This is the aspect that our planning deals with, not where it is now.
Where possible, pensions should be nominated to a Pension Death Benefit trust. This ensures that any lump sum payout would direct into trust rather than any beneficiary’s estate. The trust allows the trustees to make a decision regarding the pension at the time of death when all the circumstances are known, and if it is preferable the flexi access regime can still be availed of.