Do life policies form part of an estate?
Life insurance policies, like other assets in an estate, will normally be part of a deceased person’s estate, and, as a result, a substantial part of the proceeds of a policy can be taken in order to pay IHT liabilities.
It is, however, possible for a life policy to be ‘written in trust’. This means, in effect, that the Life Company is a trustee of the asset, with legal title, (which means it is never the possession of the deceased) but, as trustees, they have an obligation to pay out the sum assured should a specified event occur, which, in this case would be the death of the insured person, to the person specified in the trust deed.
Writing a life policy in trust has two significant advantages:
1.The beneficiary does not have to wait for probate, which, even when there is a will, can take a very long time – The life company will make full payment, immediately, on production of a death certificate. Until probate is granted, the beneficiaries of a will are unable to touch the assets of the estate. This means that, for example, they cannot use the deceased’s funds to make mortgage payments, or pay bills, or deal with banks, and this can be a source of considerable distress to beneficiaries, particularly if they are dependents of the deceased.
2.The sum assured will not form part of the estate for IHT purposes.
Broadly, there are two types of trust available: absolute and discretionary. Create a fixed trust if you are sure that the beneficiaries will not change, otherwise create a discretionary trust. When creating the trust, you need an additional person who will be prepared to act as a trustee.
Most life companies allow you to create your trust on the Internet, and the process is simple. If you are setting up a life policy, it is a good idea to write it in trust at the time of the proposal, but you can put it into trust later on.
A useful guide to the process of creating a trust can be found here:
As part of the probate process, all assets belonging to the deceased will need to be valued, so that Inheritance Tax liability and Avery Associates are specialists in the valuation of the chattels of the deceased, as well as any real estate (Houses or land.) For more information, please contact us.
Note: The above information is for general guidance only, and should not be considered as an authoritative statement of the law. If in doubt, consult a legal advisor.