Guide to life Policy Assignment and Nomination of Pension Death Benefits / Expression of Wish.

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Winifred Hart
5 years ago
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1 Guide to life Policy Assignment and Nomination of Pension Death Benefits / Expression of Wish. Please watch the Online Training Film located on the Extranet under the Training Tab Training Films Remote Training Recommended Part 1 Life Policies & Pensions, PRIOR to taking any instructions. Why do CWT&T recommend that Life Assurance Polices are assigned and Pension Death Benefits be nominated, to Trust? 1) Mitigation of IHT On the death of a Life Policy owner, if the policy is not assigned to a trust, then the policy proceeds will add to the deceased s estate. Clearly then, this could potentially either create or increase any Inheritance tax liability. Pension Death Benefits do not generally add onto the deceased s estate but invariably, they have been nominated to go to the surviving spouse, or children. The Benefit then adds to their estates and hence will again potentially impact their own Inheritance Tax liabilities on their deaths. By utilising Trusts to receive these benefits, it can be ensured that they do not impact either the deceased s estate or, the recipient s estate. The Policy Holder by establishing appropriate Trusts (as the Settlor) can either assign Life Policies to Trust or nominate a Death Benefit, via an Expression of Wish to a Trust. The trusts will exclude the Settlor as a beneficiary and so comply with HMRC rules in that, the proceeds would not be deemed in the estate of the Settlor. Subsequently they would not impact on the deceased s potential Inheritance Tax. The Life Assurance Trust and Pension Death Benefits Trusts are invariably Discretionary Trusts and so none of the beneficiaries will have a right to the capital or income. Subsequently no assets in a Discretionary Trust pass onto any beneficiaries estates either. 2) Asset Protection With assets being settled into the Trusts they are legally Trust Assets and not literal assets of the potential beneficiaries. Hence the Trust funds may be protected for the potential beneficiaries against:- Nursing Care Costs, Marriage After Death (MAD), Divorce/ Separation settlements, Creditors & Bankruptcy, IHT and Generational IHT.

2 Why only assign policy assets up to the Available Nil Rate Band into each Trust? 1) Periodic & Exit charges Wherever possible, the amounts assigned or nominated to each Trust should be below the available Nil Rate Band. Discretionary Trusts are subject to Periodic and Exit Charges but these are only applicable if such a Trust has assets within them exceeding the IHT Nil Rate Band. Hence, as long as the Trust has less than the NRB within them, such charges would not be due where the policies are assigned to a trust on different days. Periodic Charges are due on each 10 th anniversary of a Trust. Exit Charges are calculated in accordance with the previous Periodic Charge. Subsequently, if the Life Assurance Policies and/ or Pension Death Benefits exceed the NRB then it would be necessary to consider multiple Trusts. All Life Policies should then have a sum assured under the NRB. Multiple policies and multiple Trusts are required. Consideration then should be given to re-broking larger policies and replacing with a series of policies based on the total sum assured required and divided by the available Nil Rate Band. If the Death Benefit exceeds the NRB then multiple Death Benefit Trusts are required and an amended Nomination of Wish letter to the Pension Provider(s). It is vital to consider possible increases in Life Policy proceeds and Pension Death Benefits in terms of the Trusts required) PLEASE NOTE - Life assurance polices cannot be split between Trusts. Re-brokering should be considered. If you have clients with large life policies that cannot be rebrokered, please contact our estate planning helpline on estateplanninghelpline@countrywidegroup.co.uk.

3 Why do CWT&T recommend that if a client s policy is already held in Trust with the product provider that this Trust is broken and the policy assigned to a CWT&T Trust? Terms of the Trust There are a number of issues to consider: 1) Perpetuity of the Trust Some Product Providers Life Assurance Trusts only have a Perpetuity period of just 2 years. That is on the second anniversary of the death of the policy holder the Trustees have to absolutely distribute the Trust Funds. These Funds then are no longer protected. 2) Mitigation of Inheritance Tax (IHT) for the beneficiary(s) A Life Policy with a sum assured in excess of the NRB assigned to trust will create future Periodic/ Exit Charges. Who would the potential beneficiaries question as to the advice if a sizeable periodic charge became due, knowing it could have been avoided? Answer. The Financial Adviser to the Life Policy. 3) Amateur Trustees Very often the Trustees appointed are inevitably also the beneficiaries (ie spouse, children), who more often or not, will distribute the monies absolutely to themselves so placing the asset firmly into their own estate and leaving it subject to IHT on their death and attackable by care fees, divorce, creditors etc.if policies are already assigned to providers own trusts, you can have the policy reassigned back to the client and then assigned to a CWT&T Trust. 4) Asset Protection In the majority of cases the Trustees of the Policy Providers Trust (often also the beneficiaries) invariably pay the policy death benefits directly out to the beneficiaries. This places the assets firmly back into the beneficiary s estate, which means that the original estate planning has failed and leaves the assets vulnerable to attack from risks such as their own :- Care fees - Marriage After Death (MAD) - Creditors & Bankruptcy, - Divorce Settlements and IHT. By having death benefits paid into Countrywide Tax & Trust Corporation s Life Assurance Trusts and Countrywide Tax & Trust Corporation assisting as Trustees, we can ensure that the Trust Funds are appropriately and tax efficiently managed. Notably we can ensure trust funds are still readily available and utilised as required, but by the use of non commercial (secured or non secured) loans, which will protect the assets for the beneficiary by not adding those assets into their estate.

4 Can all / any polices be assigned to trust? Life Assurance Policies Where clients have life assurance policies the following should be ascertained: How has the policy been written? e.g. Joint lives, Single life Has the life policy has already been written in Trust? This will establish whether or not the policy can be assigned and the type of Trust actually required. It is vital to establish these details PRIOR to setting up the Trust. Joint Life 1 st Death plans If the policy has been set up on a joint life first death basis then these policies should NOT normally be assigned for the following reasons. In order to ensure that the trust qualifies for IHT rules, neither of the lives assured could be named as a beneficiary of the Trust- this would mean that on first death the surviving spouse/ partner would not have access to the benefits. The options here are to replace the joint plan with two single life plans or where one client has poor health, an option is to remove the healthy life assured from the joint plan making it a single life policy, thus reducing premiums and set up a new duplicate plan for the younger or healthier life assured. If this is not possible then a Probate Trust could be set up and the policy assigned to this trust. A Probate trust differs in that the Settlor/s are nominated as beneficiaries of the Trust and so can have access to the benefits of the plan assigned. This is suitable for investment bonds, endowment policies as well as joint life first death policies. (Please refer to the Office for guidance on the assignment of bonds, endowment policies and joint life plans). Please note that, when assigning policies to a Probate Trust the policy benefits would be deemed to be inside the owner s estate and the only advantage to the client is that the assets would bypass probate and be immediately available to the beneficiaries. Joint Life 2 nd Death Plans There is no problem assigning these plans to a Joint Life Assurance Trust. Neither of the lives assured need to benefit from the death benefit, as the plan is designed to pay out on 2 nd death and so it poses no problem that neither of the lives assured is a beneficiary of the trust. Such policies should still be established with a sum assured under the NRB and hence the use of multiple Trusts.

5 Multiple Policies Where the client has several single life plans, the value of each with the NBR they should be assigned to trusts on different days. Where a client has several policies whose value exceeds the NRB, then a series of Life Assurance Trusts should be set up and numbered accordingly ie No 1, No 2 etc. on different dates. Policies which are already written in Trust Where policies have already been written into trust by the product provider, you MUST refer these to the Advanced Estate Planning Team on estateplanninghelpline@countrywidegroup.co.uk who will analyse the existing Trusts and then advise accordingly. Please note there is a charge for this service. Are Pension plans / Death In Service Benefits assigned to Trust in the same way as Life Assurance Policies? Pension Death Benefits Unlike Life assurance policies or Investment Bonds, Pension death benefits cannot be assigned to a Trust as this would transfer the ownership of the pension policy to the Trustees and so a written request to the Trustees of the Pension fund is made. This is referred to as either an Expression of Wish or Nomination of Pension Benefits. Where clients have pension plans, either current or paid up and company schemes with death in service benefits (DIS) then the following rules apply. Firstly obtain the death benefit value and set up the appropriate number of Pension Death Benefit Trusts (dependant on the available Nil Rate Band) they should be numbered and dated in sequence. Unlike Life Assurance policies, for those clients who have large Pension DIS or death benefits which exceed the NRB in a single plan then these pension death benefits could be split (Countrywide would apply for various segments of the pension policy to be paid into a different Pension Death Benefit Trust, on different dates, so as not to be seen as collective ie segments 1 to 10 to Pension Death Benefit Trust No 1 and segments to Pension Death Benefits no 2. Here it is imperative that the trusts are set up on different dates and have different beneficiaries, where possible. (Please allow for any possible capital growth in regards to pension benefits when setting up the number of Trusts).

6 Pension Term Assurance Although rare, certain clients own Pension Term Assurance Policies, again these cannot be assigned to a Trust, owing to the fact that the client has tax relief on the premiums which cannot be transferred and so the benefits can only be nominated to a Pension Trust by use of an Expression of Wish Form. What if I want to assign an Investment Bond into Trust? The Assignment of a bond into Trust is a much more specialised process and you should refer to the information contained within the Products section - Assigning Bonds to Trust / Live Trusts on the Extranet PRIOR to undertaking the assignment work.

Guide to Policy Assignment and Nomination of Pension Death Benefits / Expression of Wish.

Guide to Policy Assignment and Nomination of Pension Death Benefits / Expression of Wish. Please watch the Online Training Film located on the Extranet under the Training Tab Training Films Remote Training