Putting a Life Insurance policy into Trust for a child - confused!

[Magicpaintbrush]

Can somebody clever please explain to me what my tiny brain is struggling to grasp here. I have taken out a life insurance policy of 100k which I want my DD (currently 17 years old) to be the sole beneficiary of, so that when I die she will have money to pay for whatever comes up (funeral, house clearance/sale etc) and then have some left over. The Martin Lewis website suggested putting the policy in Trust to avoid it being subject to inheritance tax. So, I am now reading through all of the bumpf sent to me from the Insurer, and my brain is melting.

Have I got this right - so long as the insurance policy doesn't exceed £325,000 (the nil rate band) there won't be any inheritance tax to pay on this?

I don't intend to take out any additional policies, unless at some point I decide a specific funeral policy would be a good idea (not yet looked into that - but I still don't think it would take it over the nil rate band).

Is that correct or am I misunderstanding. I had to read it three times before I came to this conclusion.

Any help appreciated (in simple terms) thanks :-)

"Have I got this right - so long as the insurance policy doesn't exceed £325,000 (the nil rate band) there won't be any inheritance tax to pay on this?"

No. Provided that it is done properly then it doesn't matter what the value of the life insurance policy is - it could be millions - it isn't counted as part of your estate for IHT purposes.

The trust is an entirely separate entity from yourself and the trustees look after it on behalf of the beneficiary. Your only role in this is paying for it. As a result, it is not counted as part of your estate.

One thing that you do have to look out for though is how you are making the premium payments. These can be quite expensive.

The premium payments you make are treated as gifts for IHT purposes. But, as long as you are making regular payments from your income (rather than your savings) to pay for the insurance policy then that won't matter.

If, instead of paying the insurance premiums from your income, but rather you use your savings to pay for the premiums then they will be counted as gifts and any of these gifts (above £3,000 per year) that you made in the seven years before your death will be counted as still belonging to your estate.

If you're in your 50s then £100,000 of cover might cost around £150 per month. But do compare providers. So, for that sort of level you don't really need to worry as it is less than £3,000 per year.

Have you thought about critical illness cover? I got cancer last year (all fine now) but at the time I could draw my £100k life insurance. I did and thank god I had it otherwise we would have lost our house along with all the other stress!! The mortgage is paid off which will eventually go to my daughter in time

"The premium payments you make are treated as gifts for IHT purposes. But, as long as you are making regular payments from your income (rather than your savings) to pay for the insurance policy then that won't matter.
If, instead of paying the insurance premiums from your income, but rather you use your savings to pay for the premiums then they will be counted as gifts and any of these gifts (above £3,000 per year) that you made in the seven years before your death will be counted as still belonging to your estate."

I'm curious, @Another2Cats : do you have knowledge of this field? I'm interested that paying such premiums is treated as gifts for IHT purposes. We're about to take out such a policy, and it would be good to know.

I'm afraid that insurance premiums are indeed treated as gifts if they are above the relevant limits or not from income (and can be treated as chargeable lifetime transfers depending on the type of trust).

There is an excellent article explaining things from Aviva here

https://connect.avivab2b.co.uk/adviser/cpd-knowledge-centre/benefits-of-placing-life-insurance-under-trust/

If you scroll down right to the very bottom you will notice that it says

"The premiums paid are treated as a gift for inheritance tax purposes. The premiums are, however, usually exempt from any IHT calculation under the normal expenditure from income exemption or the annual exemption."

.

As I mentioned above

"The trust is an entirely separate entity from yourself and the trustees look after it on behalf of the beneficiary. Your only role in this is paying for it."

Paying insurance premiums is a "transfer of value" and any transfer of value that decreases your estate and increases or maintains the value of something else (in this case the trust) is a gift - referred to as a Potentially Exempt Transfer (PET).

But most people don't need to worry about this as the premiums usually come under one of the exemptions that mean that they are disregarded.

Am.i right in thinking another plus about the OP putting the policy "in trust" means paying to her DD is not delayed by probate etc? So even if IHT is not a concern, speed is a benefit?

Much appreciated, @Another2Cats . Thanks for the clear explanation and the link.

Thank you to everyone who has replied, I really appreciate it.

Our situation is slightly unusual. My DH died of bowel cancer five months ago, and prior to his death he claimed on his life insurance policy and was able to pay off our mortgage. My situation now is that I receive a widows pension which is topped up by my (modest) income as a freelancer, but if anything should happen to me in terms of critical illness I will still receive the widows pension which covers our essential monthly outgoings, but it isn't quite enough to cover day to day stuff that crops up randomly (like birthday presents, car servicing/mot, Christmas, one off things like replacing the broken washing machine etc - my work income covers those things currently). The policy I have taken out covers terminal illness, although not critical illness. Maybe I should have thought about that - maybe I will adjust the policy at some point to see if I can include critical illness (which may or may not be terminal). I think I was just thinking about my DD not having any financial burdens when I die and I didn't really think about critical illness prior to that, but these things can happen so I should have considered it.

If the policy is not written in trust the payout will go into your estate.

The nil rate band applies to the whole of your estate including any payouts not in trust. You don’t have a separate nil rate band for insurance.

However, if you leave your home to a direct descendant and you have inherited nil rate allowances from your husband, you may have up to £1m allowances.