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Life Insurance

Protecting Your Estate

As you will doubtless know from watching the news and reading the papers lately, changes are constantly afoot to the way inheritance is dealt with in terms of tax. Anybody with an estate / property could be liable for Inheritance Tax if they die, but help is at hand - Daai can provide you with a life insurance policy which takes Inheritance Tax in to account.

The irony about Inheritance Tax

Unfortunately, Inheritance Tax is required to be paid before the value of the estate in question has been released to the beneficiaries. What this essentially means is that your family and benefactors can not claim what has been left to them in your will, and then choose to pay the tax from that. Instead, they must pay the tax immediately after the value has been calculated.

The most obvious way for your benefactors to solve this problem is to take out a loan to pay the tax owed. However, this can lead to unnecessary debts on their behalf, and seems ridiculous when the money they need is simply sat in the bank awaiting release. However, there is a way to get around this quandary.

Adding Inheritance Tax Cover to your Life Insurance

The best way to get around the Inheritance Tax quandary is to take out a life insurance policy which will pay out on your death and so cover any Inheritance Tax due on the estate. Since they essentially regain whatever tax has been paid when they receive their inheritance, so the life insurance lump sum can then be used as it would have been before. An important consideration to remember is that your life insurance policy could be considered to form part of the deceased's estate, so the plan must be set up under a trust. A fringe benefit of this is that all proceeds of the policy are paid free of tax.

How does the plan work?

For a married couple, a whole life insurance policy tends to be taken out in both parties names and is then payable only after the last person has died. If the policy is only covering a single person, a whole life insurance policy is still taken out but in their name alone. The insurance plan is set up as a trust, with the beneficiaries usually being the children and other family members of the deceased.

Protecting pre-death gifts

Another way that people attempt to eliminate Inheritance Tax liability is by simply decreasing the size of their estate before they've died. They usually go about this by making gifts to family members and grandchildren - these will remain tax-exempt as long as the giver lives for seven years after the gift was given.

Of course, there is always the risk that the donor may die within the seven-year period, so the donor will often take out a life insurance policy to cover the cost of the tax payable, should they die within that period. This type of insurance is technically known as a 'gifts inter vivos' policy and it will run for seven years. The policy is set up in trust to ensure that the funds fall outside the donor's estate for tax purposes. The beneficiaries are normally the heirs to the estate.