Are you currently in a position where you wish to continue to retain control of your capital and assets during your lifetime, but there is already an underlying Inheritance Tax (IHT) problem for your estate?
If this sounds like you, then you may incur an IHT liability in the event of your death and so, instead of your entire estate being passed on to your loved ones in its entirety, your beneficiaries may be faced with the burden of an Inheritance Tax bill payable to HMRC(currently 40%), on part of the estate value, which could potentially have been avoided.
If you wish to protect the value of your estate for your beneficiaries, there are alternative planning strategies that can be implemented to manage this scenario.
One of the simplest ways in which to mitigate a future inheritance tax (IHT) liability is to put a whole of life (WOL) policy in place to fund the payment of IHT duties after your death.
This may be an option if you are not prepared to gift away capital or assets in your lifetime, or where government allowances cannot provide a meaningful basis to help mitigate your future IHT liability. Alternatively, it may be considered as a policy in combination with other IHT planning measures.
As circumstances change, some flexibility in the amount of cover and how long the cover is in place can be built into these types of arrangement in a cost-effective way.
For expert advice on insurance matters why not book a call with a Financial Adviser from Integrity365. Email Integrity365 directly for more information.
A WOL plan with reviewable premiums can be an ideal way to leave a lump sum for your loved ones, in order to pay the IHT liability where there are other strategies being used to reduce that liability over time.
Others may wish to choose a guaranteed premium product. This enables you to know exactly how much the policy is going to cost each month, no matter how long you live. However, your financial adviser may suggest allowing the cover to increase with inflation. This will then help to account towards any impact on the value of your estate and thus not needing to apply for more cover each year.
The importance of a Trust
When using a WOL policy for IHT planning, it is paramount that the plan is written into trust for the beneficiaries. In the event of a valid claim, this means the funds will be payable to the beneficiaries tax-free and can then be used to pay towards any calculated IHT liability. In the absence of a trust, the policy would be part of your estate, thus further adding to the inheritance tax problem.
A WOL policy can be written on both a single- or a joint- life basis. Typically, cover for a single person would be a single-life plan on their own life, written under trust for the benefit of whoever will inherit your estate.
For those who are married or in a civil partnership and who are leaving everything to each other on first death, a joint life second death policy enables the policy to help mitigate towards the IHT liability on the death of the surviving party. Again, the policy should be written under trust for the interests of those who shall benefit from the estate.
It is also very important for you to think about who the trustees should be. A trustee should be someone you trust to carry out your obligations. This could be a partner, a family member, or even a friend. Trustees have obligations and duties to act on for the settlor, so the selection of persons for these positions shouldn’t be taken lightly. It is important for the trustees to be fully aware of your intentions in the event of death so that they can carry them through on your behalf.
Understanding the impact of inheritance tax planning choices and, adopting the right planning measures, are integral first steps in order to ensure the successful mitigation of any IHT that may be due on your estate in the future.
The content contained herein is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or any other advice.
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