The importance of trusts when protecting your client and their loved ones

The pandemic is driving demand for better quality protection advice so writing business into trust is more vital now than ever before, writes Vitality tax and trust expert Kim Jarvis.

Two years ago, the world was a different place than it is today. The Covid-19 crisis will continue to significantly impact the lives of everyday people for many years to come. As a result, the insurance industry has witnessed a growing demand for financial advice¹. Not just due to uncertainty around whether taxes will need to rise to support increasing public spending, but through growing awareness among clients for the need for adequate protection for themselves and their families in light of the pandemic².

Ensuring that we can pay our bills if we become ill or through a cash sum on death is often on the ‘to do list’. However, in light of the pandemic, it has moved higher up this list for many people.

With the average cost of a funeral in 2019 being £9,493³, it can be difficult for those left behind to cover the costs. Especially if their estate consists of mainly illiquid assets such as the family home. It may be possible to obtain a loan from a bank, but by providing life cover and placing this in a suitable trust an individual can make sure their family receives a cash sum quickly.

Whole of Life Cover alongside Serious Illness Cover and/or Income Protection is one of the simplest methods of ensuring money is made available in the event of illness, accident or death, and arranging cover at an early age may mean that premiums will be lower.

What is a ‘split’ trust?

Placing the plan under a suitable ‘split’ trust, is nothing new. It is straightforward and easy to understand. And arranging the cover when there is more potential for premiums to be lower means that the cost could be more manageable. Under a split trust the settlor could retain some benefits from the plan (such as Serious Illness Cover) whilst being able to gift others (such as the Life Cover).

A split trust gives the settlor the best of both worlds; the settlor can access any serious illness or income protection benefit that might become available, without preventing the deceased’s family from receiving any Life Cover before probate is obtained (providing there are surviving trustees).

Mitigating inheritance tax (IHT)

When the plan is placed in trust each premium paid is treated as a gift for inheritance tax purposes. However, this could potentially be covered by the normal expenditure out of income exemption. This overlooked exemption is a very useful when paying regular premiums as there is no seven-year clock and it doesn’t disturb any other exemptions, such as the £3,000 annual exemption.

Most legislation talks about a ‘reasonable’ person, but this exemption is tailored to each individual. The exemption is only available for gifts made out of surplus net income taken year on year and needs to form part of their normal expenditure leaving them with sufficient income to maintain their normal standard of living. However, your client needs to be aware that if their income changes – whether through a change of job, redundancy or retirement – not only could their affordability change, but their premiums might no longer qualify for the exemption.

Vitality’s Personal Protection plan has many uses and can adapt to a client’s changing circumstances. By being able to add and increase cover, paying any extra premium going forward ensures that the plan continues to provide the best protection for the client and their family.

Couples living together do not have any legal rights

Even with lockdown restrictions now lifted in England, the effects of Covid will be felt for years to come. These will only continue to encourage people to get their affairs in order.

For some couples, the thought of not seeing each other during lockdown meant that they moved in together. If the relationship has gone well, those couples may now need to consider the legal implications of living together, and this is where a professional adviser can help. Does the couple need to consider executing or updating their wills to ensure that their partner is protected should one of them pass away? Remember, there is a common misconception that unmarried couples, living together, share the same rights as those who are married.

Wondering if a trust is a suitable option for your client?
Use our Trust flowchart

Sources:
1. https://www.ftadviser.com/pensions/2021/10/07/boom-in-financial-planning-expected-in-next-5-years/
2. More than a third of people said that the pandemic has made them more aware of the need for life insurance, rising to more than half for those aged between 25 and 34
3. https://www.sunlife.co.uk/siteassets/documents/cost-of-dying/SL-cost-of-dying-report-2020.pdf/