Should you get insurance to protect your family from an estate nightmare?

Thousands of relatives are facing huge delays in dealing with the affairs of a deceased loved one due to a collapse at the probate office.

Five years ago, obtaining probate took about ten days from the time you filed. It’s been going on for about three months now. Combine that with the time it takes to prepare an estate for filing and attorneys warn it could take up to a year before probate is granted.

The waiting period is so terrible that families are now at risk of high interest penalties for not paying their taxes on time.

The added stress is a heavy burden on already grieving family members, but with careful planning it is possible to spare your family the administrative nightmare and ensure they have no trouble beating the tax clock.

The government expects inheritance tax to be paid within six months of a person’s death. Interest will then be charged on the account at a rate of 7.75 percent.

If probate is not granted on time, executors may struggle to find the money to pay the estate taxes. This is especially difficult if the majority of the estate is an illiquid asset, such as a property that needs to be sold.

Greg Fletcher, solicitor at law firm Cripps, says: ‘Inheritance tax is payable no later than the end of the sixth month after death. This term poses significant problems if the principal value of an estate lies in the family home. HM Revenue & Customs recognizes this and allows property tax due to be paid in ten annual instalments, but interest will still accrue from the end of the sixth month after death.’

According to government figures, the average inheritance tax bill is £214,000. The interest on that would be £319 per week. If it had taken 12 months for the executors to settle the estate, apply for probate and grant probate – as many lawyers are now warning – the tax bill would have risen by £8,294.

One solution is to get life insurance today. This way, when you die, your family will have immediate access to cash to pay the estate taxes before any interest has to be added. Keep in mind that only four percent of estates end up paying estate taxes.

Taking out a policy means you will pay premiums for the rest of your life, but if you die, the policy will pay out enough to cover your tax bill. Knowing that your family doesn’t have to wait to pay their taxes can be a great stress reliever. For this plan to work, however, you will need to place the insurance policy in a trust, as Greg Fletcher explains: ‘If the policy pays out to your estate at inheritance tax, this will increase the value of your estate and the associated inheritance. tax.

‘On the other hand, if the policy is written in trust and paid out to appointed trustees, it will remain outside your estate and no inheritance tax will be payable on the value of the policy at your death.’

The other advantage of placing the insurance policy in trust is that – since the trust deed gives your trustees the power to administer the policy – ​​it can be paid out immediately after your death without the need to probate. This means that curators can then process your inheritance tax assessment without waiting time.

While this trick can ease a huge burden for many families, it won’t work for everyone. Premiums for this type of policy are typically high, so it’s best suited to people facing a significant estate tax bill – perhaps like wealthy crime novelist Harlan Thrombey in 2019’s Knives Out, whose death left a tangled web of intrigue his life brings about. fortune.

For example, a £1 million whole life policy taken out by someone in their 50s is likely to cost around £300,000 in premiums if they live into their 80s. A joint whole life policy paying out £214,000 – the average inheritance tax bill would cost £175 per month for a couple in their 50s.

Petronella West, CEO of asset manager Investment Quorum, says: ‘Although you will never benefit from the policy, the premiums you pay will almost certainly be substantially lower than the final payout your family would receive from the insurance company. The younger you take out, the cheaper the premiums and the better your legacy will be, but don’t incur costs that you can’t bear for the rest of your life.’

If you start paying premiums and at some point can no longer pay them, the policy will be canceled and you will lose all the money you have already paid.

West gives the example of a family she has advised: John Wilson, 48, and wife Jane*, 38, with two young children. They have significant wealth from the sale of their company. After taking financial advice, Mr and Mrs Wilson expect to face an inheritance tax bill of around £10 million when they both die.

West recommended getting a joint life, second death and whole life insurance policy written in trust. The policy will pay out £5 million on their death and will cost them £38,000 a year, which they can pay from their income.

West said: ‘We have not recommended covering the full £10 million inheritance tax with the insurance payment as John and Jane intend to make charitable donations in the future, which will reduce the value of their taxable estates. It would also have substantially increased their premiums.”

The Wilsons’ insurance policy will be placed in a discretionary trust for the benefit of their executors, which they can use to pay the estate taxes. Most insurance companies have a standard trust deed template you can complete to place your policy in trust, but it is wise to seek advice from a lawyer.

You must be very careful when setting up the life insurance policy because once you place it in a trust, you cannot change your mind. It cannot be reversed. A wish letter is a document that you write yourself and place next to your will. Although it is not legally binding, it can provide useful additional information for your executors and your family.

West says, “Having witnessed many family fights and terrible disagreements, I always encourage families to discuss things together before someone dies. But if that’s too difficult, it always helps to use a letter of wishes as a guideline for the executors of the will. “If there’s a lot of money and young adult children involved, it can be a good idea to write down who they can talk to and trust now that mom and dad aren’t there to give advice.”

* Names have been changed.