The advantages of putting your death in service benefits and life insurance into trust

Aug 21, 2019 | Tony Byrne's View

Do you have death in service benefit from your employer? If so, have you made a death benefit nomination?  Do you have life insurance?  If so, is it in trust?

The benefits of trusts have diminished significantly in recent years, but they remain an excellent tool to use for both death in service benefits and life insurance.

So what is death in service benefit?  It is the life insurance provided by your employer usually through the company pension scheme or separately. Typically, the amount of death in service benefit is expressed as a multiple of your salary with a figure of 2-4 times your salary the most common multiple. So, if your salary is say, £40,000 a year and your death in service benefit is 4 times your salary you will have £160,000 life insurance.

When you work for an employer you are usually invited to join the pension scheme. As part of this process you are usually invited to join the death in service benefit scheme and given a death benefit nomination form to complete.  Most people nominate their spouse or partner and/or children to benefit 100% when they die. Very rarely does the employee think of putting their death benefits into trust. The major benefit of doing so is that the death benefits avoid probate, they get paid immediately into trust and they do not form part of your estate, so they usually avoid Inheritance Tax.

Life insurance is typically provided by a personally owned policy. Most life insurance policies are not written into trust. It is estimated that a mere 6% of policies are put into trust. The reason for this is because most policyholders are blissfully unaware of the major benefits of putting their life insurance policies into trust. As with death in service benefits, life insurance policies avoid probate, they get paid immediately into trust and they do not form part of your estate, so they usually avoid Inheritance Tax too.

So why have I stated that putting death in service benefits and life insurance into trust usually avoids Inheritance Tax, rather than always avoids IHT? Well, this is because if the insurance policy is for a particularly large sum assured in excess of the Nil Rate Band of £325,000 the trust itself will be subject to Inheritance Tax on the excess above the NRB at a rate of 40%. So, it is important to ensure that if your life insurance exceeds £325,000 it is made up of 2 or more policies with a sum assured not exceeding £325,000 per policy. Each policy will need to be put into a separate trust on different days too otherwise all policies/trusts will be treated as one and only one Nil Rate Band will be shared between all of them meaning a higher IHT liability for the trust and a lower amount paid to the beneficiaries.

As for large death in service benefits exceeding £325,000, there is no easy way to prevent the excess above £325,000 in trust becoming subject to Inheritance Tax other than by negotiating with your employer.

So if you would like advice on the advantages of putting your death in service benefits and life insurance into trust, why not get in touch with us? You know it makes sense.

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