I never ceases to amaze me how many people appear to love the taxman more than their family.
When we first meet new clients, we regularly find that their life assurance and pension benefits are arranged in such a way that the taxman stands to be the single biggest beneficiary on their death. This would be unfortunate if it was difficult, time consuming or expensive to avoid. It is almost criminal given that the solution is simple, efficient and relatively inexpensive. When these people become clients of Forty Two they find their affairs better organised.
Take Joe an example. Joe has sufficient assets to exceed his Nil Rate Band allowance for Inheritance Tax purposes (currently £325,000). On death the first £325,000 of his estate will be tax free but the balance will suffer inheritance tax at 40%. Joe has a life assurance policy that pays out £1,000,000 on his death. However, as things stand the proceeds of the policy will form part of his estate and suffer inheritance tax of 40% (£400,000) leaving only £600,000 to be split between his three children. Each of the kids would receive £200,000 and the taxman would receive double this amount. In this situation it would be easy to conclude that Joe loved the taxman more than his own family.
If Joe were to simply place the policy in trust the full £1,000,000 would bypass his estate and no Inheritance Tax would be payable saving £400,000. That’s £400,000 pounds of love!
Trusts can range from simple free “off the shelf” documents supplied by life insurance companies through to some very complex bespoke structures. We recommend that virtually all life assurance and pension death benefits should be placed in trust. Along with writing a will, this should be one of the first quick and easy steps in creating a proper estate plan. As trusts form part of a more comprehensive estate planning strategy we would recommend using a suitably qualified solicitor to ensure the trust meets each individual’s personal needs.
As trusts are legal documents you would expect every solicitor would have his or her own life assurance and pension death benefits written under trust to protect their families from the nasty tax man. However, we often find that this is not the case. It is one of those “cobbler’s bairns” situations where professionals are so busy looking after their clients’ affairs that they just never get round to sorting out their own. One of the key benefits of working with a professional financial planner is having someone to audit current arrangements, recommend a suitable strategy but most importantly ensure the agreed strategy is implemented and reviewed. Left to our own devices, there is always something more important than arranging that trust.