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17.09.20

Mortgage Protection – Are we missing a trick?

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Life insurance is frequently taken out to repay a mortgage in the unfortunate event of death. Indeed, this is viewed as an essential cover for both families and lenders alike to ensure that the spouse, partner, or family member has funds available to pay off the mortgage.

Similarly, Death-in-Service Benefits from a pension or Group Life cover is often earmarked for repayment of a mortgage.

On the death of the insured, the benefits pass out as intended. The mortgage is paid off, increasing the equity ownership. All good, but are we missing an opportunity here?

When a claim is made on insurance, the insurance falls into the insured’s estate. This causes the following problems:

  • The insurance proceeds could be liable for Inheritance Tax (IHT)
  • Probate may need to be obtained before the insurance proceeds can be claimed
  • When passing to a surviving spouse, the assets fall into their estate and will be included in any future “re-marriage” estate
  • If a re-marriage ends in divorce then the funds will be included in the divorce settlement
  • If the recipient of the insurance proceeds is made bankrupt the funds will be included in the bankruptcy order
  • If the recipient receives means tested benefits, these will be affected by receipt of the insurance

Writing the policy or benefits under an appropriate trust immediately removes all of these problems.

An appropriately drafted trust, designed to hold the insurance pulls the benefits away from the insured’s estate so that the benefits are held by the trust, and not by the estate. This means that in the event of death the proceeds can be paid out without the grant of probate. Even more important is the fact that the funds will be outside of the insured’s estate and so not liable for IHT and, even more importantly, protected from divorce & re-marriage.

However, another very important point is that the proceeds held within the trust can be retained outside of the beneficiary’s estate. This both reduces the impact from future IHT and social impacts and third party claims – in essence, this means that, in the event of the death of the person insured, the proceeds will be held in the trust and used by the beneficiaries (either by releasing income or loans to them). This can potentially avoid another layer of Inheritance Tax which is payable in the event of the beneficiary’s’ death. The assets can remain in the trust for up to 125 years), thus providing the same protection for children and grandchildren.

Trusts are an essential element of planning for clients to protect against unnecessary payment of Inheritance Tax, and key long-term wealth retention within the family.

Our short video that helps to explain this in a simple way.

Mortgage Protection – Are we missing a trick?

Need to know more? If you have a question or would like more information please contact me or email me at julie@jarrovian.co.uk

Julie Kitson
Director, Trusts & Estate Specialist

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