Family Income Benefit - IHT & Policy Ownership

Hi,

I was discussing a case this morning and got stumped on the issue of IHT on FIB. If a husband takes out a FIB on his own life, not in trust, and dies with 20 years of the term remaining, what is the IHT position of this on the estate? And would the will need to explicitly state this benefit as payable to his wife?

How do people get round this? Life of another or trust?

Thanks

Benjamin Fabi FPFS
Chartered Financial Planner

http://twitter.com/benjaminfabi 

Comments

  • The IHT value is the discounted value of the benefit payable; some life office offers a full lump sum alternative so you would use that figure.

    If not in trust and wanted to go specifically to surviving spouse then a suitable clause in the Will would suffice. This seems to me to be a very messy approach.

    Placing the policy into a discretionary trust is the simpelst way of avoiding this.

    My mantra for any life cover - This should be in trust (now prove me wrong, as there are (very few) exceptions to the trust rule.)

  • Thanks Richard,

    I reached the same conclusion re a clause in the will. messy and flawed. Although IHT is spared through spousal transfer, what if there is no such clause or it is revoked/changed for some reason and the FIB ends up falling into a trust for the residue?

    Similarly, life of another seems neat and tidy, but there is still a problem with second death. And if the income needs change this is then a bit like having a DGT where you aren't spending the income - all surplus is taxable in the estate on death.

    The main objection to a trust is admin burden for what is essentially a simple in/out payment each month. but I can't see how the disadvantages of not using one overcome this.

    Benjamin Fabi FPFS
    Chartered Financial Planner

    http://twitter.com/benjaminfabi 
  • Will: If used (and spousal gift fails) then you have two problems.

    One is valuing the future 'income' payments to complete the IHT return (although likely to be covered (at least in part, if not in full) by Nil Rate Band.

    The second is the estate administration. Whilst IHT can be settled the FIB payments will always go to the executors who will then have to distribute each payment in line with the Will. This could involve the estate being admitted for 19 years. This would, of course, be avoided if the life office agreed to a one-off lump sum settlement in lieu of the regular payments.

    Trust: Placing such a policy in trust does not create any real administration burden, other than needing to open a trust bank account in the event of a claim. Each payment in is capital of nature as is each payment out. So, unless the sums involved are extreme, no tax will be due in the trust so no tax return and no HMRC registration.

    Life of Another: Agree. A simple solution provided clients agree to die in the right order, otherwise you have the same issues as under the Will.

    I would always use the trust route. Not much admin and by far the most flexible to changes in future circumstances.

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