Joint life policies and trusts – could you, should you?

24 September 2020
Should you ever consider writing a joint life policy into trust? Is it even possible and if so, what are the benefits?

Couples dancing in the gardenWriting policies into trust usually deliver three good customer outcomes. Right money, Right hands and Right time.

  • Right Money – claim proceeds won’t be subject to Inheritance Tax charged on the estate of the deceased.
  • Right Hands – you can nominate your intended beneficiaries to make sure that the policy proceeds will go to the right people and end up in the right hands.
  • Right Time – claims on policies written into trust will not require the production of a Grant of Probate (England, Wales and Northern Ireland) or a Certificate of Confirmation (Scotland) as part of the claim process. It’s estimated that it can take, on average, up to 9 months to obtain a Grant of Probate.1 

But aren’t those three reasons why it doesn’t make sense with a joint life policy?

Let’s look at an example on what would happen with claims specific to joint life policies and look at each of these trust outcomes again.

We have a couple of clients called Brian and Jane who are married and have a joint life first death policy. What would happen if Brian dies and Jane needs to make a claim?

Question 1 - Will this deliver the right amount of money?

We’re usually talking about the problems caused by the proceeds of the life policy forming part of the estate and being subject to a possible inheritance tax charge. But that shouldn’t be a problem because Jane can claim the full sum assured.

Question 2 – Will the proceeds go to the right hands?

As we’ve just pointed out, Jane will make the claim.

Question 3 – What about right time?

Life offices won’t ask for a grant of probate or certificate of confirmation for claims on joint life policies which means there shouldn’t be any delays for Jane to receive her claim pay out.

At face value, this looks like three good reasons not to write your joint life policy into trust.

Another situation we need to consider…

There is another situation we need to consider. What would happen with the proceeds from the life policy if both lives assured died at the same time, or within a short space of time of each other? It’s very likely that the intention was for the proceeds of the policy to benefit each other. But are there any provisions beyond that?

We know that if Brian dies but Jane survives, Jane can claim the proceeds quickly. But if they both die, the life company would require a grant of probate or certificate of confirmation on the second death as part of the claim process. And if they die together it’s the youngest which is deemed to have died second.

There are probably no IHT concerns on first death for a married couple. But the second death life policy would form part of the estate and would be included in the calculation to value the estate. This simply means that the inclusion of the life policy sum assured could add to or even create an inheritance tax charge.

Special type of trust for joint life policies

There are trusts that are specifically designed for joint life first death life policies. These are typically discretionary trusts, but they include a special ‘Survivorship’ clause. Sometimes known as a ’30 day wording’.

Let’s say Brian and Jane are involved in a road traffic accident and Brian dies at the scene. Jane survives but is in critical condition. The test to determine what happens next is whether Jane survives. If Jane survives 30 days following the death of Brian; under the terms of the trust, Jane would become absolutely entitled to receive the plan proceeds.

This makes sense because if Jane is alive, she will presumably need the funds herself?  The definition of ‘dying at the same time’ on trusts with the Survivorship clause is typically 30 days across most life offices.

At the 30 day point, Jane becomes the beneficiary of the plan proceeds.

But what if they both die?

Let’s imagine Jane doesn’t make it and dies from her injuries a few days after Brian. If she dies within 30 days following the death of Brian, the plan proceeds are held in trust for their chosen beneficiaries. They will not enter their estate and will not form part of any Inheritance Tax calculation. This means this special type of trust delivers two possible outcomes.

If one life assured dies but the other survives, the survivor can benefit from the plan proceeds and are absolutely entitled to them. But if both die, within a period of 30 days of each other, the proceeds are held in trust and outside of their estate.  This means the value of the estate won’t be inflated by the sum assured from the policy. And there shouldn’t be any delays in processing the claim. The trustees can also make payment to the correct beneficiaries as per the wishes of Brian and Jane.

This type of trust makes sure you can deliver the three good customer outcomes, for both scenarios – Right money, Right hands, Right time.

Royal London Trusts

At Royal London, we have a range of different trust forms for different client scenarios including those clients with joint life first death protection policies.

We also have a tool to help you find the right trust if you need help.

Source: 1 - ukcareguide.co.uk, How long does probate take in the UK in 2020, September 2020.

 

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About the author

Vincent O'Connor

Senior Protection Development and Technical Manager

Vincent has worked in Financial Services since 1994 and has experience across a range of different perspectives. He has started out at a life company and then ran his own Mortgage and Protection brokerage. Most recently he worked for a large network where he set up their ‘Protection Academy’ for adviser learning, development and skills training, but is now back at a life company (Royal London); again with a specialist focus on protection. Vincent is involved in developing adviser facing content, presenting, writing articles and commenting for the press. Vincent is passionate about the need for protection, but also about the importance of proper financial advice. Vincent enjoys his holidays, good food and quality time. He also enjoys art and crafts in his spare time!

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.