Protection and Estate Planning
Protection and Estate Planning
In last week’s Round up we discussed the role that Protection can play in securing a family’s financial position in the event of death or illness. This week, we will touch upon the role that Protection policies can have in Estate Planning.
Firstly, we should identify what constitutes an ‘Estate’. An Estate is the sum total of what you are worth when you die. Typically, this includes your home, savings and investments, life assurance policies (not in trust) and other personal possessions.
If the value of the Estate is more than the available Nil Rate Band (NRB) then an Inheritance Tax (IHT) liability will be created. Fortunately, there are special rules relating to lifetime gifts which can help to limit or reduce the liability.
Gifts are exempt from IHT provided the donor survives for a period of 7 years from the date the gifts were made. These gifts are known as Potentially Exempt Transfers (PETs). Should the donor pass away within the 7-year period there is still a potential liability to IHT, which may reduce over the 7-year period via Taper Relief. For more information on Taper Relief please see our previous article - Inheritance Tax & Taper Relief.
A common way of protecting the beneficiaries of gifts from the potential tax liability is to set up life assurance policies to cover the reducing liability. These are known as ‘gift inter vivos’ policies and have a fixed term of 7 years with the cover reducing in steps to match the reduced liability. Although the cover reduces the premium typically remains fixed for the whole 7 years.
It is important that the policy is written into Trust to ensure that the benefits are outside of the Donor’s Estate. This means that the sum assured can quickly be paid to the beneficiaries to pay the IHT liability as soon as possible.