Following
the theme of my last blog, where I talked about the effective use of a
Will and the services of a professional financial planner, today’s blog
outlines some basic thoughts to help avoid the need to pay inheritance tax on
life policies and pension plans.
In the case
of life policies, these can and should usually be written in trust, as if they
aren’t, the death benefits will be paid to the policyholder’s taxable estate,
and be subject to inheritance tax. In this situation, a discretionary
trust is often suitable, with the policyholder’s partner as the principal
potential beneficiary, together if appropriate with any children. This
generally brings an additional layer of flexibility and avoids further
Inheritance Tax problems in the event of the policyholder’s partner/spouse
dying.
In the case
of pension plans, an expression of wish in the form of a ‘letter of wishes’
should always be written by the planholder to the scheme trustees indicating
the person or persons to whom they would wish the value to be paid in the event
of their death – indeed these often form part of the original application process.
Some scheme trustees who are unwilling to follow expressions of wishes,
insist on paying plan proceeds to the planholder’s estate. Consideration might
be given in these cases to switching to a more accommodating pension scheme.
As an
alternative to an expression of wish, a formal pilot trust (or ‘spousal by-pass
trust’) might be established – especially for larger pension arrangements. This
would give the trustees discretion to pay the proceeds to a wide range of
potential beneficiaries, including the surviving spouse, but would enable them
to ensure that the surviving spouse received only what he or she needed, so
that the balance of the fund would not be held in their taxable estate on their
death, and therefore avoid inheritance tax.
Duncan Wilson
Private
Client Partner
Telephone: +44 (0)20 7893 3456
Email: getintouch [@] broadstoneltd.co.uk
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