Taking out a life insurance trust makes the policy exempt from IHT when you die as it places it outside of your estate, yet very few policyholders use trusts.
Adviser website Unbiased estimates that because of this some £530million will be paid out needlessly in IHT this year on life insurance policies. That is inflated in part by soaring house prices that have seen thousands more households breach the £325,000 IHT threshold on estates.
Karen Barrett, of Unbiased, said: ‘Many of us want to pass on our estate to loved ones after we’re gone but what people don’t realise is the sizeable tax bill we might also be handing over in the process.
As the housing market continues to boom and the IHT threshold remains static, this leaves many more of us at risk of passing on an unnecessary tax bill.
‘Planning ahead can mean your beneficiaries don’t pay more tax than they need to as there are many strategies for reducing an inheritance tax bill including wills, pensions, trusts and other tax advice.’
Some life insurance customers may not need to put their policies into trust, because they may be designed to pay off a mortgage, for example, or the money will go to a spouse which makes it exempt from IHT.
But those looking to leave a legacy to their children or other loved ones could instead land them with a tax bill if their life insurance policy is included within their estate.
As well as the tax exemption, policies left in a life insurance trust will pay out a lot quicker than going through the probate process, with cash handed over within weeks, rather than months.
It also protects people named as beneficiaries in the trust in the event the policy-holder divorces and marries again.
But why are so many people failing to take advantage of trusts? Well, Minesh Patel, of EA Financial Solutions, said ‘a lot of this is down to apathy or ignorance.’
He said: ‘I would suggest that ignorance is one reason, particularly when the product is not purchased through financial planners.
‘Sometimes there are also difficulties in knowing who to appoint as trustees, and apathy may come into play when they consider the time it takes to get signatures from trustees and witnesses.
‘But the benefits are considerable and financial planners are best placed to guide their clients through the process.
‘In the case of married couples and civil partnerships if your assets exceed £650,000 in the current tax year on death your beneficiaries will pay 40 per cent inheritance tax on the amount by which it is exceeded.’
Find out your IHT liabilities and how to set up a life insurance trust by contacting Just Wills & Legal Services Anglia