Ask Sindie: how to buy cover and avoid a tax trap

Your money problems solved

My partner and I have just had our second child and want extra life cover to minimise the financial difficulties if one of us should die.

Q. My partner and I have just had our second child and want extra life cover to minimise the financial difficulties if one of us should die.

A financial adviser friend tells me new policies should be put in trust to prevent any payout being included in either of our estates for inheritance tax [IHT] purposes.

It sounds complicated and expensive but I'm keen to do it if it could save money. How should I go about arranging a trust? If it makes any difference, we're not married.
DR, by email

A. Simple life cover that pays out on the death of the person insured at any point during its agreed "term" - usually 25 years - can soften the blow to a family's finances at a time of great emotional stress.

Yet many people don't realise that when they die, life insurance payouts are regarded as part of their estate and could count towards an IHT bill.

The taxman can take 40 per cent of any sum over £263,000, and rising property prices have left millions of people with assets above this threshold. Whether or not this applies to you, an insurance payout could push up the size of your estate and catch you in the IHT net.

Writing your cover "in trust" means that if you or your partner were to die (assuming you have each taken out a policy or bought joint cover), the money will bypass the taxman and be channelled into the trust instead for distribution to the surviving partner and children.

Even though the tax rules for married couples mean life-insurance payouts pass to spouses free of IHT, it is still a good idea for life cover to be written into trust. This usually ensures a speedier payout if one partner dies, since the money won't be held up while the will is in probate.

Creating the trust should be neither difficult nor expensive, although the cost will depend on where you buy it. First ask a policy provider (which may be a life assurer, broker or even a supermarket) if they include a trust form for free - or if there is a charge for doing so.

"It costs the provider a bit more to process [the policy], which is why some don't like to promote trusts," says Jason Wyer-Smith of Virgin Money.

If you buy life cover through a broker or financial adviser, a small sum - around £10 - is sometimes added to your bill to put the policy in trust.

Since you're creating a trust, you have to name beneficiaries and sign a legal document before witnesses - usually friends or family. As a general rule, if you're single with dependants and don't have complicated finances better served by separate trust planning, it will be worth writing your policy into trust.

If you need financial advice or help from our consumer champion, write to Sindie at The Independent on Sunday, Independent House, 191 Marsh Wall, London E14 9RS or email sindie@independent.co.uk. We cannot return documents, give personal replies or guarantee to answer letters. We accept no legal responsibility for advice given.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
peopleFrankie Boyle responds to referendum result in characteristically offensive style
News
news
Arts and Entertainment
musicHunter Davies has collected nearly a hundred original  manuscripts
News
news
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
New Articles
i100
Life and Style
lifeAiming to show breasts in a non-sexual way for cancer awareness
New Articles
i100... while following the referendum
New Articles
i100... with this review
Voices
Holly's review of Peterborough's Pizza Express quickly went viral on social media
Arts and Entertainment
Nick Frost will star in the Doctor Who 2014 Christmas special
tvNick Frost, Natalie Gumede and Michael Troughton step up
Arts and Entertainment
Matthew Beard, Ben Schnetzer, Douglas Booth and Jack Farthing in ‘The Riot Club’
filmReview: Sheer nastiness of Riot Club takes you aback
Arts and Entertainment
tvBut something’s not quite right
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior BA - Motor and Home Insurance

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Market Risk & Control Manager

    Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...

    SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

    £320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Head of Audit

    To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week