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Life Insurance policies will pay a lump sum (often tax free) to your next of kin in the event that you die and a successful claim is placed.

When you purchase a Life Insurance policy you can place your policy within Trust with the insurer. This is a legal document that essentially gifts the Life Insurance benefit from your estate to your intended beneficiaries. If your estate is worth more than £325,000 individually or £650,000 for a couple (the Inheritance Tax Threshold) placing your Life Insurance in Trust can help to protect the value of the policy for your beneficiaries.

Where Life Insurance policies are placed into Trust:

  • The Life Insurance payout is gifted outside of your estate so there should be no Inheritance Tax (IHT) payable on the policy payout
  • You can decide who handles the policy benefit (Trustees) to direct the money where you want it to go
  • You can indicate who you want to benefit from the policy payout (Beneficiaries)
  • Every 10 years a trust is subject to tax (but only relevant if there is money in the trust at this time, i.e. a plan has paid out). You should seek legal advice if you are in this situation.

When Life Insurance policies are not placed into Trust:

  • Life Insurance payouts form part of the estate and are dealt with the executor of your will or through laws of intestacy
  • There should be no IHT between spouses or civil partners
  • If the Life Insurance policy and your estate take you over the IHT the excess may be taxed at 40%

As a Trust document is a legal document it is essential that it is completed, signed and dated correctly throughout so that the insurer can place your Life Insurance into Trust. If you would like to discuss putting a policy into trust please contact us on 0800 567 7450 and we will be happy to help.

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