Life Insurance for Estate Planning
Estate planning is worth considering if you are concerned about leaving your estate to the tax man and not your loved ones! Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they're valued at less than the threshold (£325,000 in 2013/14). If you have an estate that is worth more than this it could be eligible for Inheritance Tax.
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies up to as much as £650,000 in 2013/14. The estates's executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die.
Unfortunately, Inheritance Tax must be paid upfront before the beneficiaries can witness the value of the estate. Currently the tax is levied at 40% (2013/14) If the family of the deceased who are set to receive the estate do not have the money to pay for the tax, they may end up having to take out a short term loan to fund the tax.
One way to avoid paying out for Inheritance Tax is through writing a life insurance policy in trust. This will mean that the insurance policy does not form part of the deceased’s estate for reasons regarding Inheritance Tax.
Life insurance can benefit estate planning in this respect, as it will help to ensure your next of kin have financial peace of mind without the worry of having to raise funds to pay death duties.
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Life insurance for estate planning is useful for many reasons. These can include:
- Estate liquidity
- Paying off debt
- As a replacement for income
- Accumulating wealth