John from Bury asks: "My wife and I each have a 20-year term life insurance policy with Legal and General with a sum assured of £100,000. What would happen to these funds if we both died and would our children end up paying inheritance tax on the money?"
If you and your wife both died, the policy proceeds would form part of your individual estates.
If you died first, the proceeds of your policy would be inherited by your wife.
If she died a short time later, having not spent any of
that money, it would then form part of her estate, along with the proceeds of her own policy.
If, when added to the rest of her assets, the total was above £285,000, your children would pay inheritance tax on the excess.
To reduce the effects of the tax, you should write these policies under trusts to each other with the children as default beneficiaries.
A flexible family trust is ideal, as the beneficiaries can be changed by the settlor (the person who declares the trust) at a later date.
This can be useful if you want to add grandchildren to the list of potential beneficiaries later on.
Having the policy in a trust will ensure that the proceeds are paid outside of the policy-holder's estate.
This means that if you died first, while your wife would still receive the money from your policy, when she died, the money from her policy would be paid from the trust to your children.
As the sum assured would be paid from the trust it would not form part of your wife's estate, and the money from her policy would therefore not be subject to inheritance tax.
That would take £100,000 out of her estate and reduce the overall effects of inheritance tax.
If you have other life insurance policies, you might want to check with your financial adviser about putting those in trust, too.
Trust forms are normally available free of charge from the insurance company you have the policy with.
Although it is easier to write a policy in trust at the time of making the application, most policies can also be written in trust after they have been placed on-risk.
Contacting NickNick Plumb is an independent financial adviser. Send your questions to Nick at Bright Financial Planning, 58 Station Road, Sudbury, Suffolk, CO10 2SP, email them to
nickplumb@aol.com or telephone Nick on 01449 675674.
Nick's answers to reader questions in this column are provided only as a general guide and do not constitute personal financial advice. For any readers requiring specific advice on their own circumstances, Nick is happy to offer a complimentary initial meeting.
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