Unintended Errors in Inheritance Tax Calculations Result in £350 Million Loss for Families - Have You Overlooked This Basic Mistake?
In the ever-evolving landscape of legacy wealth planning, the complexities surrounding inheritance tax have become increasingly prominent. With the impending changes to pensions and the scrapping of business and agricultural property reliefs, it's more crucial than ever to consider the benefits of placing life insurance policies into an Irrevocable Life Insurance Trust (ILIT).
If a person is seriously ill when they put the policy in trust and dies within seven years, HMRC could argue the policy had a value and seek to include it in the estate for inheritance tax purposes. However, if the policies are written into trust, they would not normally be liable for inheritance tax, as they are ringfenced assets. The payout from a life insurance policy can be sent directly to beneficiaries, thereby avoiding inheritance tax.
Sean McCann, a chartered financial planner, emphasizes the importance of families not paying inheritance tax on life insurance policies unnecessarily. He states that many people who buy life insurance without advice are unaware that if they don't put the policy in trust, it's included in their estate and could be taxed at 40%.
Setting up an irrevocable trust and transferring your existing life insurance policy into it or having the trust purchase a new one is relatively straightforward. The trust becomes the legal owner and beneficiary of the policy, so proceeds are paid directly to the trust, not your estate. You must fund the trust to pay policy premiums; these payments to the trust may be gifts subject to gift tax rules, but adding Crummey powers can help avoid gift tax up to allowable limits.
To fully exclude the policy from your estate for tax purposes, you need to survive at least three years after transferring the policy to the trust or have the trust buy the policy outright. After your death, the trust distributes the proceeds to your beneficiaries according to the trust terms, avoiding probate delays, and beneficiaries typically receive the payout income tax-free.
However, once the policy is in an ILIT, you relinquish control over it. You cannot change or dissolve the trust easily. It's wise to choose trustees carefully (usually two or more adults) to manage the trust and payout as per your instructions. Consulting an estate planning attorney or tax advisor before setting up an ILIT is also advisable to ensure it fits your situation and complies with current tax laws.
In the tax year 2022/23, nearly a quarter of the estates that paid inheritance tax included life insurance policies, totaling £865 million. In 2022-2023, about 3,700 more deaths resulted in inheritance tax, bringing the total to 31,500 IHT-paying estates, an increase of 13% compared to the previous year. This underscores the importance of proper planning to avoid unnecessary tax burdens.
The tax-free allowances are frozen until 2030, which means more and more families will be caught in the inheritance tax net. Inheritance tax is due on assets above the £325,000 nil-rate threshold per person, but couples can pass on up to £1 million inheritance tax free due to the £175,000 nil-rate main residence threshold per person.
In conclusion, placing your life insurance in an irrevocable trust effectively removes it from your estate, thereby avoiding inheritance tax and probate delays, while ensuring your policy benefits pass to heirs as you intend.
- For those considering legacy wealth planning, the benefits of placing life insurance policies into an Irrevocable Life Insurance Trust (ILIT) become particularly significant, especially with the changes in pensions and the removal of business and agricultural property reliefs.
- Keeping track of mental health and personal wellness is crucial, but it is equally important to keep a close eye on personal finance, as many individuals who buy life insurance without consulting a professional may be unaware that their policies could be taxed at 40% if not placed in a trust.
- For those interested in business, entrepreneurship, and finance, understanding the intricacies of investing in property and the implications of inheritance tax can help in making informed decisions about wealth management strategies.
- To promote health-and-wellness and fitness-and-exercise, avoid paying unnecessary tax on life insurance policies by placing them in an irrevocable trust, a move that can save families significant amounts of money in the long run, as demonstrated by the £865 million in 2022/23 that was saved by avoiding inheritance tax on life insurance policies.
- As more families fall into the inheritance tax net with the freezing of tax-free allowances until 2030, seeking the advice of an estate planning attorney or tax advisor to set up an ILIT and properly plan the distribution of life insurance policies can prevent unnecessary tax burdens and ensure that their intentions for the beneficiaries of their policies are fulfilled.
