If you die your dependants might have to pay
inheritance tax on any life insurance payout you have arranged for them.
There are a few ways to prevent or diminish the taxes.
Life insurance can provide protection if a
family member dies such as paying the mortgage or providing a lump sum of
cash for a family member.
However one decision that needs to be made is whether an insurance payout to
the beneficiaries should come to them directly or should come to them
through an aalternative route such as a trust. By putting the insurance into
a trust you can reduce your inheritance tax by thousands of pounds.
What is a trust and how is it used?
A trust is an arrangement, which can be written down in a formal
"deed of trust" that gives benefactor control over how the beneficiaries
receive the assets and helps the beneficiaries by reducing the amount they
have to pay in tax.
Tax Savings
If you have substantial wealth when you die setting up your life
insurance in trust means that your beneficiaries will not have to pay tax on
the insurance payout.
To give an example, ifyour assets are worth more than £325,000 and a life
insurance policy has a payout of £100,000, this amount could be reduced to
£60,000 if the insurance policy is not placed in trust. £325,000 is the
current inheritance tax threshold. If one has assets between £225,000
and £325,000 your life insurance will still be taxed but at a lower rate.
Other benefits
Since the payout from the trust does not form part
of ones estate, there is often less legal
procedures that have to be undertaken for the money to pass to the
beneficiaries so as a consequence the beneficiaries often receive the money
quicker than if it is not placed in trust. If the life insurance is not
placed in trust it forms part of the estate which means the proceeds of the
life insurance policy along with the proceeds of other assets are used to
pay the inheritance tax first before the beneficiaries can be paid, but not
if the insurance is placed in trust.
Other considerations
The costs of putting the life insurance policy in trust is often
zero, and the insurance companies often put the policy into trust for free
when one takes out the policy.
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Life insurance to reduce inheritance tax