Joint Life First Death Term Assurance - Into Trust?
arongunningham
Member
I believe, by standard definitions, a joint life policy would lead to joint settlors (if it was placed in trust). Therefore a regular trust wouldn't work, and in fact not necessary since the surviving spouse still owns the policy anyway - and settlors can't be beneficiaries.
If i'm right, the best method of placing these policies in trust is with the 30-day survivorship clause.
My question is - is that your default position too? If the insurance provider don't offer the survivorship clause in their off-the-shelf trusts, what do you do?
Comments
Joint settlor. Not necessarily; only if joint owned. So you could have single owner but joint life.
However, as joint life assured first death you obviously don't know who the survivor will be (I tend to find clients reluctant to agree on who will actually die first and stick to it!) so placing in trust at outset, as you say, is a non starter.
I'm not sure I understand what you are saying about a 30 day survivorship clause? Can you expand?
My understanding of this is that the beneficiary must survive at least 30 days otherwise the gift fails. It's probably done to stop the benefits passing to the beneficiary's beneficiaries if they die at the same time, or shortly after (if that makes sense!)
My understanding is that if both spouses die together it would effectively bypass the survivor (the younger of the spouses) and go direct to the beneficiaries.
The 30 day rule is to ensure, as morbid as it is, that one of them doesn't die a few days later in hospital, after a tragic accident - I think.
I don't know if this is the default 'best way' to handle joint life first death policies?
The issue I don't fully understand is how a settlor can be a beneficiary (which is what a trust would be for a joint life firsts death plan). I wonder if that's why the surivorship clause was created.
I just cannot see how this can work.
When do you set up the Trust? During Settlors lifetime, therefore, the settlor is always going to be a beneficiary (unless of course, your trust specifically excludes both as beneficiaries), so you cannot create a tax effective trust; you can create a trust but in my view you create more problems than you solve.
At the time you create the trust you must have also created a Gift With Reservation - each spouse has the potential to benefit from the trust during their lifetime (in that the trustees could pass the policy out of the trust to them) or from death proceeds on 1st death basis.
The fact that you might, under certain circumstances, by pass the surviving spouse (because they didn't survive long enough) as far as where the trustees eventually distribute any life cover does not, as far as I can see, avoid the Gift With Reservation in the first place; thus no effective gift has been made.
Where you have both spouses die together, unless there is medical evidence to the contrary, it is deemed that the eldest dies first. Jointly owned, joint tenants (non-trust) asset passes to the survivor automatically; a 30 day survivorship clause in a Will cannot override this as the asset is not available to the deceased person to freely dispose of.
I'd be very interested to hear from anyone who has a definitive solution which actually works and deals with these issues.
Here's the guide L&G pointed me to: https://www.legalandgeneral.com/library/protection/taxation-and-trusts/W13397.pdf
Thank you - clearly you can do it! I am surprised but then again shouldn't be as trusts are ever complicated!!
Can I ask the obvious questions:
What is the purpose of the protection?
Why aren't you recommending two single life plans in individual trusts?
"Whilst a policy in the Survivor’s Discretionary Trust will not usually form part of your estate for
Inheritance Tax purposes, if one of the settlors survives the death of the first settlor by 30 days the
proceeds are payable to the survivor and will form part of the survivor’s estate. "
This seems like a very limited and unlikely window (ie they both die within 30 days of each other) for there to be a benefit of structuring protection into a trust like this?
What am I missing here?
Well it's for those who have a car accident (for example) and one spouse lives a few more days. I think that's why the clause was introduced.
The trust is designed to pay the beneficiaries if both settlors die, as you'd expect, but with the proviso that if there is a surviving spouse, the trust will be null and void.
I get the point about the 2x single life policies, but that's not relevant to this - it would lead to excess cover and higher cost.
That was sort of my point.
The evidence threshold for doing this in favour of single life policies would be very high in my book.
As a retrofit trust for clients who come into the office with an existing contract, then fine (assuming it can be used with existing contracts?), but for a new recommendation I can't see it ever being more suitable than two single life policies.
Won't you need to buy £1m cover for a £500k mortgage?
Joint Life second death for £500k is £110 per month
Single Life for £500k is £50.83 each
So its more cost effective to both do single life.
Why would you do JLLS for a mortgage?
That aside, even if 2 separate policies is a bit more, it's not by much. I had separate L&CI plans and my wife claimed on hers. The advantage of that is that mine is still running, so I don't have to buy another plan which would probably cost a fair bit more now that some years have passed since the policies were first taken out. The CI definitions will also have changed so I'd more likely end up with a lesser quality plan for a higher cost
Single Lives totalled £77.80 pm
Joint Life was £60.09
Mine was based upon assumptions about age and amount. In any case, £17.80 a month for the additional cover is not to bad.
If you did use Joint Life First death for a mortgage, the money would be used to pay off the mortgage anyway, which would form part of the estate?
yep... it's a zero sum game.
So further to my initial enquiry, we've since decided it's not really worth the aggro and complications of setting up a trust.
If they died together the money goes into probate, so the only downside is the time factor, if they died together (versus Trust receiving money pretty much instantly).
But if you're paying off a mortgage, then setting up the trust for the proceeds of the life policy has no value. In the very remote case where they die together, the probate process will settle the debt, and the asset that needs dealing with, through a trust created by the will, is the house.
Even if the trust received the money instantly, the house and the debt are in probate process, so you don't mitigate the time problem.
The real value here is going to be initiating the conversations that make the clients think about that remote possibility, and what happens to kids and assets if it does. There is also work on providing additional financial support to those willing to take on the kids.
That's off-topic but thanks.