A life policyholder wishes to settle his life policy described in the policy schedule as a “whole of life, unit-linked plan designed to give financial protection through payment of the sum assured either on death, permanent disability or diagnosis of one of a range of critical illnesses.”
The policy is also stated to have a surrender value of £30,000.
Does anyone see a problem with settling the policy in trust with respect to inheritance tax, or any other tax for that matter?
The Encyclopaedia of Forms and Precedents life policy trust precedents defines the trust fund as: (a) all that interest of the Settlor in the Policy assigned below to the Original Trustees and all money assured by or to become payable under or by virtue of it and all benefits and advantages of it;"
My concern is that with this standard wording the critical illness benefits will be assigned to the trustees as well. Should the above wording be changed to something like: “all that interest of the Settlor in the death benefits payable under the Policy”? Or does anyone have a link they can share to a precedent that suits this situation better?
If the trustees hold “all money assured by or to become payable under or by virtue of it and all benefits and advantages of it” the settlor (who will have been excluded from the class of beneficiaries to avoid reservation of benefit issues) will not be able to avail of the permanent disability or critical illness benefit.
The death benefits should be held by the trustees for the beneficiaries (which will/must exclude the settlor) whereas the permanent disability/critical illness benefits should be held for the settlor. The life office might be able to provide a draft wording to meet this objective and might also be able to provide Counsel’s Opinion in support.
Any permanent disability or critical illness benefit actually paid will fall back into the settlor’s estate but will presumably be rapidly depleted by the costs of care.
Often the settlor/life assured only wishes to settle the death benefit payable under the policy (and possibly any terminal illness benefits) whilst at the same time retaining any critical illness cover. This can be achieved by carving out the critical illness cover to be held on bare trust for the settlor with the death etc benefits held on trust for the (typically) residuary beneficiaries (the settlor being excluded to prevent any GWR issues.
As a general rule the value of a life policy is its open market value (IHTA84/S160). The open market value is the amount for which the policy could be sold, and might be more than the surrender value.
This value of this settlement could be more than the surrender value if the life assured is in poor health or if the policy is a traditional with profits policy. If so, you may need to keep an actuarial valuation on file as a precaution.
The ideal actuary would be Brian Watson who can be contacted via life policy auctioneers Foster and Cranfield
Although the sum assured is relatively low, if the critical illness cover is carved out the valuation of the transfer would need to take into account the likelihood of critical illness before death, as this wouldn’t be settled. Definitely one for someone with specialist knowledge, as already mentioned.
N