After receiving financial advice, Doris decided to set up a trust. At the same time, she created and placed a life assurance plan in the trust to cover inheritance tax (IHT) on her estate. Doris was made the sole trustee.
Years later, she passed away and left her estate with a £90,000 IHT liability. Her son Wilbur believed this could be covered by her life assurance plan, which he expected would pay out £100,000.
However, he was told this was not possible when he tried to claim it. When life assurance is placed in a trust, the trustees are the only legal owners and hence the only ones who can apply for the sum assured upon the assured’s death.
As Wilbur is Doris’ legal personal representative, he does have the power to appoint a new trustee. However, probate (which should be read as covering letters of administration as well as having no will in place) must be granted to legally allow Wilbur to do so. This results in a delay in paying the claim until probate has been granted.
Generally, IHT has to be paid before probate is granted. Without the proceeds of the life assurance plan, Wilbur might find it difficult to raise the money to pay the IHT liability on the estate, which directly contradicts Doris’ reason for putting the life assurance in a trust in the first place. Ultimately, Wilbur might have to sell Doris’ other assets, his own assets or take out a short-term loan.
Wilbur has found himself in a circular problem. Without probate, he cannot add another trustee to the trust to make a claim, but probate cannot usually be obtained without the proceeds of the claim. This creates a block on the estate, and adds upsetting delays at an already difficult time.
Wilbur will have to raise funds to pay the IHT required to go through probate to fix this problem. This could have been easily avoided if Doris had appointed at least one trustee in addition to herself when she set up the trust and plan. When she died, the surviving trustee(s) could have liaised with the life company to ensure the prompt payment of the claim, enabling access to the estate for distribution to beneficiaries.
It is also a good idea to regularly review the ongoing suitability of the appointed trustees, and consider replacing trustees in poor health before they lose the capacity to sign.
Advanced planning with a client does not stop at taking out the plan and placing it in a trust. Trustees will be responsible for making a claim to the life company on the death of the life assured.
It is therefore important there are trustees other than the settlor or life assured appointed, and that they are people the settlor can trust to act promptly on their death.
In this case, as Doris is the sole trustee and is also the settlor or life assured, there is no one upon her death who can play this important role. Therefore the life company will have no one to instruct it on how and where to pay the death benefit.
Rachael Griffin is a tax and financial planning expert at Quilter