How life insurances help to combat Inheritance Taxes?

We all look for ways to avoid paying inheritance taxes. One simple way to avoid paying the inheritance taxes is by taking out life insurance and then putting it in a trust. Inheritance Tax insurance is a good way of avoiding paying the taxes and also saving the tension of paying the taxes.

Ways to avoid paying Inheritance Taxes

Can an individual avoid inheritance taxes? Yes, they can. If a person inherits an estate or a property that crosses the inheritance tax threshold, then they become liable to pay the inheritance taxes. However, there are some ways with the help of which you can reduce the inheritance tax amount that your heirs or beneficiaries will have to pay. The ways are as follows.

  • One can leave a part of their assets to a charitable organization. Donating ten percent will bring down the inheritance amount from 40 percent to 36 percent.
  • One can pay in a pension instead of in a savings account.
  • You can give a gift of £3,000 a year to your friends and relatives.
  • You can put all the assets and properties in trust for the heirs or beneficiaries. 
  • You can take out a life insurance policy and place that in a trust to cover the liability of the tax.

Can a person use life insurance to pay Inheritance Tax?

Inheritance Tax insurance is a good way to get rid of the tax problem. One can take out a whole life insurance policy and this policy remains effective till your death. This will help cover the inheritance tax bill that one expects the heirs to pay. Suppose, the property is £200,000 over the inheritance tax threshold, then you will need a policy that will be able to pay out £80,000 to cover the inheritance tax bill completely. To avoid the proceeds of the policy from getting under inheritance tax, you need to mention it in the trust.

Suppose your family does not require any kind of financial support but you want to leave for them a good amount of money, then also you can take out a life insurance policy.

There are insurance policies that can cover the inheritance tax bill on the assets in the event of an individual dying within seven years. Again one needs to mention it in the trust so that it can be used in that way. 

How to put a life insurance policy in trust?

When you put a life insurance policy in your trust, it means that the payout will directly go to the beneficiaries and not to the legal estate. Hence it will not be subject to inheritance taxes. One will have to set up a legal arrangement by appointing trustees who will look after the trust in your absence. This is a straightforward process for setting up. The life insurance provider will be able to help in most cases and the service will also be free. 

One can put the Inheritance Tax insurance in the trust at any time. However, it is better to do this as early as possible. Some of the advantages include:

  • The payout will not count towards the estate and hence will not be liable for inheritance taxes.
  • You can specify the heirs or the beneficiaries and hence this will help in allotting the money later on. 
  • If the policy is not part of the trust, then the heirs will be able to receive the money at the earliest so that they can cover any inheritance tax if any.

Hence these are some aspects of Inheritance Tax insurance that one must know about so that they can deal with it easily.

Read Also: How you can save money using 2 Insurances

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