For many people their Life Cover arrangements or Family Protection policies can often represent a major part of their Legacy which isn’t fully appreciated. With many policy values and benefits valued in the £100,000’s. These can offer the beneficiaries significant financial security but if not protected correctly could end up wasted.
In the event of your death the proceeds of your policies will be distributed as follows:-
The money will pass into your estate and then be distributed according to the action of your Will or on Joint policies be paid direct to the surviving policy owner. In some cases Wills may be challenged which is one possible concern, but there are greater threats. Firstly the value of the benefits could be liable to inheritance tax when passed into your estate, which is chargeable at 40%.
Another significant threat which is particularly concerning was the real possibility that the benefits could fall outside the family bloodline should your partner remarry or if in future years your children were to divorce or even the possibility of your beneficiaries requiring long term care and this legacy used to cover the costs.
The money will pass to your wife/husband/beneficiaries. This means that the benefits from the policy will avoid your estate and probate but will ultimately fall directly into their estate which can adversely affect the protection of your wealth. Again the value of the policies could be liable to inheritance tax, which is chargeable at 40% on their death.
Another significant threat which is particularly concerning again was the real possibility that the benefits could fall outside the family bloodline should your partner remarry or if in future years your children were to divorce or even the possibility of your beneficiaries requiring long term care and your legacy used to cover the costs. Pension trustees may still exercise their rights of discretion but generally miss a very important part of trust planning when releasing the benefits absolutely. So even having a trust in place affords no guaranteed protection to your legacy without the relevant professional advice to protect the legacy.
The solution we advise to clients to protect against these threats to your wealth is to protect Life Cover benefits within a purposely designed, family controlled pension Trust known as a Life Cover Trust (LCT).
The LCT is a specially constituted Trust that is established during your life time with an initial nominal Trust Fund and is specifically designed to collect your life cover benefits. On your death the benefits from your policies/schemes are directed into your Family Trust. Your chosen beneficiaries (typically your spouse, children and future generations) will then have full access to the Trust as they would have without it in place (at the discretion of the Trustees) but with the addition of the bespoke advice and documentation to secure the protection of the legacy before its distribution.
As the death benefits are held in Trust this means that the assets will be ring fenced from both any future inheritance tax charge potentially saving 40% and from loss through the re-marriage of your partner and ultimately your children’s partners in years to come. This solution will therefore overcome the primary threats to your protection benefits in addition to help protect against the legacy being used towards long term care costs, bankruptcy and has a shelf life of 125 years so your blood line will be enjoying your legacy in generations to come.