Essential Tax Planning


01 July, 2011

Ensuring that our family would be well provided for financially should anything happen to us can be a big concern. With this in mind many of us have pension arrangements which would pay out a tax free lump sum death in service benefit or life insurance policies which would pay out on our death. These sums can be substantial, typically at least three or four times salary for death in service benefits or hundreds of thousands of pounds in life cover (often intended to cover a mortgage).

Whilst it is comforting to know that this financial assistance is there, these extra benefits are often overlooked when thinking about inheritance tax planning and the value of your estate. If these benefits are paid out directly to a surviving spouse, they can significantly increase the value of their estate and immediately take them into the realms of inheritance tax.

One simple planning tool is to make sure that death in service benefits and the proceeds of life insurance policies are paid into trusts instead of directly to a surviving spouse. In this way the value of the funds remain outside of the surviving spouse's estate for inheritance tax purposes and can be protected for the wider family longer term. The benefits are not however "locked away" and the surviving spouse can be a beneficiary of the trust. The funds can be made available to assist the surviving spouse during their lifetime, by way of direct payments, loans or the acquisition of assets for use by the spouse - whichever seems the most appropriate or efficient at the time.

It is a relatively simple procedure to set up one or more "shell" trusts which can sit dormant until such time as they may be needed. You then inform your pension scheme that you would wish them to pay any death in service benefits to the trust or assign the benefits of any life policy. The funds will pass into the trusts tax free on your death and can be used to benefit your family after your death.

For further information or advice please email Victoria Motley or call 01772 220022.


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