H and W have a joint life first death policy. Usually second death policies are written in trust for IHT reasons, (amongst other things). However as H and W are financially secure, it would appear to be tax efficient to write the first death policy in trust. Do members agree?
Further, I don’t believe any of the ‘standard’ trusts provided by the policy providers allow for this, so presumably a bespoke trust and assignment of the policy to the same would be required. Comments are welcome.
Most provider draft trusts are agnostic as to whether the policy is on a ‘first life’ or ‘second life’ basis.
“The Policy” is usually defined as policy number 123456 issued by Mega Life plc.
There must have been a reason why the policy was written on that basis so that should be investigated before deciding if it should be held in trust.
As Gerry says most providers trusts will accommodate placing joint life first death plans into trust. Some will have the option of a “Revert to Settlor” clause. This means if the surviving settlor survives the first death by 30 days the surviving settlor is the beneficiary of the death benefit. If the settlors don’t opt to use this clause then on first death the beneficiaries will be entitled to the death benefit not the surviving settlor.
Kim Jarvis
Vitality
Hi Yes,
The provider should be able to provide a trust deed.
I should be able to email you their deed if you wish.
Once the policy is in trust the trustees would be the legal owners and on the second death, they could seek to distribute the proceeds as wished.
Clive Perks
Supportive Financial Planning
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A typical structure might be a discretionary trust which contains a, say, 30 day survivorship provision. Under this approach if the surviving spouse survives for 30 days post the first spouse’s death the surviving spouse takes the policy proceeds.
As you suggest H/W are “well off” there may be little point in including the 30 day provision as presumably the policy proceeds might more usefully be left directly to other surviving beneficiaries as provided under the discretionary trust.
My experience is that life offices provide standard worded trusts to cover these options.
Malcolm Finney
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Dear Clive
It’s a Scottish Provident policy, and I would be grateful if you could email me a deed. haroon@iwillsolicitors.com
Many thanks.
Thank you all.
Essentially, what I had in mind was for the policy proceeds to be held on discretionary trusts after first death, with the surviving spouse excluded from benefit. The proceeds could be used for adult children, grandchildren or perhaps even invested to clear with the second death IHT liability in mind. (The critical illness element will probably need to be carved out.). I was unsure about whether this was the “done thing” as all the commentary appears to be about writing a second death policy into trust, but little or none relating to a joint life first death policy.
I just wonder why a joint life first death policy was taken in the first place. My understanding is that this is often to ensure that borrowing, such as a mortgage, is cleared off on the first death so that the survivor is not burdened with trying to pay instalments from what might be a reduced income stream. Whilst H and W currently are financially secure, will this continue to be the case fort the survivor after the death of either of them?
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Hi Paul
That was precisely the reason; insurance to cover a large mortgage. However, the mortgage was cleared many years ago, and the client’s financial position is significantly better than anticipated. IHT planning is now a more significant issue and due to health reasons, it is easier to use the policy in existence than to take out a new policy. In addition pension benefits mean that the surviving spouse should have no financial concerns whatsoever.
Hi Haroon
I have sent you the trust forms.
It may also be wise to look at other solutions to reduce their IHT liability as well.
As stated above the provider may have trust forms. We find providers may not accept them after inception as they insist the client uses a solicitor because of potential entry charges / or takes advice. - you mention they have health issues? The policy may have a market value for IHT if either die before the term.
I’d ensure the clieht understands theyre creating a probate issue as the funds on JL would be paid out immediately. (The whole point of JL).
Easier to call the provider (many have trust departments) walk them through what you need first.
We waste a lot of time on this type of issue. So we tend to use pilot trusts. Rysaffe planning can still be useful depending on the sum assured.
Richard C. Bishop
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If the purpose is to reduce IHT, have you investigated whether the policy can be amended to a joint life second death basis?
I must admit to not having considered amending the policy and will bare this in mind on other matters. In the present instance, assets are being ear-marked for an adult daughter and the policy will provide a level of asset protection for her.
Out of interest, on a related point, if the proceeds were paid into trust and on first death the proceeds were lent to the surviving spouse on strictly commercial terms, there would presumably be no reservation of benefit? Comments welcome as always.