Inheritance Tax Planning - Wills?

[PatsyJ]

We need to update our wills to take into account our DD who is 16 mths (yikes!). We will need to think about inheritance tax planning as our estate will be over £285k so will look to a solicitor for help but....

I know this is a tall order but can anyone explain how trust funds work in laymans terms. Solicitors always end up talking over my head!

Our basics estate consist of - house (owned outright), car (owned outright), personal chattels - the usual, life insurance, pensions etc all prob worth around total of £600k or thereabouts....

I find it all soooo complicated and am worried about it and ensuring that we do the best we can for DD should the worst happen and DH and I go together...

This is what I understand:

You can take out a life insurance policy that is written in trust, which means that when you die the money from the policy does not get inherited directly by your dd, but is used to pay off any inheritance tax, thus freeing her from the need to do so.

What pc says is right. There were some changes in this year's Finance Act 2006 so make sure your solicitor takes account of those. My life insurance goes direct to the children in trust so no IHT is paid on it, whereas the house does go to them so might have to be sold to pay the IHT. My pension fund will go into a trust I set up which has £10 in it now so again it avoid IHT and of course at the moment if you give away assets and live 7 years there is no IHT to pay at all so for some people who plan well it's a voluntary tax.

And also you might want your child to inherit the nil rate band amount before IHT is paid about £265,000? so that they get that tax free and then your husband if died later can also leave her that sum tax free from the rest. Whereas if all went to husabnd who then died daughter would just get the one lot £265,000 tax free although that presupposes he won't need the money so lots of pros and cons to consider. Would be simpler if we could just abolish IHT.

you can also set up a discretionary will trust to make use of teh nil rate band efficiently info here

\link{http://business.timesonline.co.uk/article/0,,9559-2230145,00.htmltimes article here}

times article here

Thanks for replies. Am still a bit stumped on the life insurance in trust bit. PC says that the trust would be used to pay the inheritance tax, yet Xenia says as it's in trust, they don't have to pay the IHT?

I am waiting for my financial advisor to call me back so hope to get it sorted asap. The Times article also helped Iota - thanks.

What PC means is you can take out a life ins policy and have it written such that it is outside your estate - so no tax due on it

Some people take it out so that the beneficiaries can use the money from the life ins to pay to IHT due on the estate. Eg kids don't have to sell the house to pay the tax

moneysavingexpert.com may also have some helpful tips

I took it out so my children would be able to invest the life insurance and live off the interest, not to pay my inheritance tax but of course they are likely to have to use some of it for that purpose. I put it into trust so the life insurance money itself is not subject to tax.

Say you take out £200,000 life insurance and don't put it in a trust and you have a house without mortgage of £200,000 you'd be paying IHT (if what you leave goes to the chidlren - I'm not married so it would). If the £200,000 life insurance is in a trust then you do not give 40% of it to Tony Blair to spend and instead you keep all that and your estate is then just counted as £200,000 which is only just above when you start to pay IHT so not so much to pay. if you had £500,000 life insurance and spend 5 minutes filling out a trust form you save paying £200,000 inheritance tax on that sum. If you don't fill out the sum you give that money to the Government.

Xenia - thanks for the updated advice. Have been to a solicitor today and we have everything underway now thank goodness ;)