Life Insurance under Trust

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Life Insurance under Trust

Many life policies are set up to cover an outstanding mortgage or loan in the event of the death of the homeowner, in which case the policy will probably be assigned to the mortgage company. A surviving spouse or family is not entitled to any of the proceeds unless the payout exceeds the amount of the loan.

Additional life cover is therefore often set up to provide the family with financial security if one or both of the parents die. It has long been common practice for such policies to be written in trust with the children as beneficiaries so that the proceeds do not form part of the deceased's estate and therefore do not carry an inheritance tax liability. The other advantage of this type of trust has been that the trustees will then look after the money until the beneficiary reaches a certain age (often 25) when, if both parents have died, the children may be considered responsible enough to look after the money themselves.

The budget of 2006 however has changed the rules for new trusts being set up. Now any funds put into a trust over the inheritance tax nil rate band (NRB) will be charged a 20% 'living' inheritance tax. Subsequently, every 10 years, a 6% tax charge will be made on anything over the NRB and then finally, at the end of the trust there could be a further charge of up to 6%.

The new rules will not affect existing trusts provided the money is handed over to the beneficiaries no later than their 18th birthday; otherwise they will be liable for the new tax charges. Existing trusts have a period of grace to be altered - up until April 2008, otherwise they will become liable. This move has prompted much adverse reaction as many people feel it is not responsible to pass potentially large amounts money to children at such a young age.

If you have a life policy where the sum assured may be paid into a trust after your death and you are worried about how the new rules could affect your family, it is a good idea to talk to a professional adviser before making changes to any existing wills or trusts. If you complete our Quick Enquiry Form above, we can arrange for one of our independent experts to contact you at a time that suits you. If you prefer, you can call us on 0845 108 0505.

Have you got enough life cover? Visit us at www.lifeinsurance.co.uk for the best rates available.

Pensions.co.uk is part of a large network of financial sites created to help advise you on life events, such as buying a house, Mortgages.co.uk; insuring your car - CarInsurances.co.uk; your life - LifeInsurance.co.uk; and your home - HomeInsurance.co.uk.

1998 - 2007 UK Pensions - Planning before, at the onset and during retirement.