The Right Money in the Right Hands at the Right Time

The Right Money in the Right Hands at the Right Time – Life assurance has come along way since the closed world of the Lloyds coffee shops and their pioneering widows and orphans payments for families of the legal profession. Today some of the largest life assurance companies are global businesses, paying out multi millions of pounds in claims every year. With companies looking to new markets, it’s now possible to pick up a life assurance application along with your groceries at the local supermarket. But here-in lies a danger.

We may have the best of intentions when taking out a life assurance policy, even calculating how much our loved ones need to pay off the mortgage, provide for our children’s education or simply to cover funeral expenses.   However, if the policy is not “written in trust” the claim payment upon death, will be delayed until the grant of probate or letters of administration is given. Worse still the value of the claim can be eroded by inheritance tax.

On the death of a life assured, the life company’s claims department need to know who to pay the money to. In the case of a jointly held life policy, where there is a survivor, this is straightforward and payment is made to the survivor. For single life policies and jointly owned policies where both people have died together, the claims department will not and cannot make any payment until they have the grant of probate, assuming a will is in place or the letters of administration where the deceased left no will.

The “grant of probate” is the official seal of approval, which allows the executors of the will, to distribute the deceased’s estate, sell shares, release money from bank accounts and importantly request payment from the life assurance company. This naturally takes some time to obtain whilst they gather up all the deceased’s documents and possessions before filing the necessary forms with the probate office. Any unexpected delays will have a further knock on effect in the time it takes to receive the proceeds for the life assurance policy. It is not unknown for executors to take up to a year to gather all the information needed to apply for probate. Delays can be even longer where there is no will and an administrator needs to be appointed.

However…. and thank goodness for howevers…. If you place the life assurance policy “in trust” the life company will know exactly who to pay the money to, it says so in the trust form. This addresses the issue of the “right hands”.

So what about the “right time”? Now anyone who has been through a bereavement will know why it is ranked as one of the most stressful events in a person’s life. It may seem that life is temporarily on hold but the mortgage still needs paying and bills will be mounting up. It’s a time when the need for positive cash flow is greatest. When a life policy is written in trust, there is no waiting for a grant of probate or letters of administration, payment will be made on receipt of a completed claims form and a death certificate. Financial stresses following a bereavement can be eased, by placing life policies in trust ensuring money is received at “the right time” with the minimal of delay.

Now, that just leaves us with the phrase “the right money”. Let’s take an example of a well intentioned grandmother who plans to leave the proceeds of her life assurance policy to her two grandchildren. Knowing how much a university education could cost, she told her daughter, that she wants her two grandchildren to share the money and use it to pay for future university fees. The policy will pay £60,000 when she dies. Assuming the life assurance company has received the grant of probate (or the letters of administration) they will pay the policy proceeds without delay….but..…when a life policy is not written in trust, the money is paid into the deceased’s estate.

Before her grandchildren can receive any distribution, the taxman needs to know the value of the estate and furthermore that inheritance tax has been fully accounted for and paid. In this example, our well intentioned benefactor has an estate comprising a house worth £300,000, a bank account, a couple of building society deposits accounts and some cash ISA’s all worth £25,000, a total of £325,000. The £60,000 payment from her life policy sits on top of that, bringing the grand total of her estate to £385,000.

The taxman then wants the tax to be paid first before any distributions can be made to beneficiaries. The first £325,000 ( the nil rate band) will be taxed at nil percent, the remaining £60,000 will be taxed at 40%. With the outcome of making the taxman is richer by £24,000 leaving the grandchildren with only £36,000 to share between them or £18,000 each, covering only two years university fees.

This is not the right money our grandmother intended for her grandchildren and here is the other however…. if her life policy was written in trust not only would it lead to a quick settlement by the life company but it would be considered “outside of her estate” for inheritance tax purposes. The full £60,000 would be paid to the trustees for the benefit of the grandchildren who would then, each have £30,000 towards their university education.
Furthermore, by writing the policy in trust and appointing trustees our grandmother is also ensuring that the monies were used for education purposes and not just blown on a new car and nights out!

Life assurance is a powerful financial planning tool but in order to make sure you get the “right money, into the right hands at the right time” make sure you do the following.
1. Write a will
2. Make sure life policies are written in trust

So next time you go to pick up a life assurance application form with your groceries at the supermarket checkout, ask the store manager if they can help you find the right trust document for the policy to meet your needs. I promise you they won’t have a clue.

I can’t emphasise enough the added value of seeking advice from a life assurance or financial planning professional who for a small fee can put existing policies in trust or even place new policies in trust at outset at no additional cost. Once the trust documents are witnessed you can indeed rest assured that the right money will be in the right hands at the right time.

c Jill Turner 2012