Bereavement is bad enough without money troubles. Rachel Clarke explains the complexities of using whole of life policies
Coping with bereavement will be a traumatic experience for anyone. But when a family is left to deal with complex financial issues on top of their grief, the situation can become much more stressful.
Most people will want to leave a legacy for family members, but this often co-exists with the objective of minimising inheritance tax (IHT) and the complexities that this brings.
However, it is possible to lessen its effects with some careful financial planning, and so ensures that death is the only devastating surprise loved ones will encounter.
Recommending a whole of life policy is ideal if a person wants to provide for their dependents on their death and protect their estate by funding potential inheritance tax bills.
A whole of life plan is a lifetime protection policy that provides a guaranteed cash lump sum to dependants after a family member's death.
Unlike a term policy, a whole of life plan guarantees to pay a lump sum whenever death occurs.
So whether the person is 35 or 95 when they die, they can be sure their tax bill will be paid, leaving their children, grandchildren or other dependants financially secure.
Advisers can often suggest strategies to minimise the amount of inheritance tax that will be due on death.
The first step will usually be a tax efficient will. Lifetime gifts can be made to take advantage of the £3,000 IHT annual exemption.
Small gifts of up to £250 can be made to an unlimited number of beneficiaries in any tax year, free of IHT.
Normal expenditure out of income and gifts in consideration of marriage can also be useful.
Gifts between married couples or civil partners are exempt from IHT, as are gifts to charities and political parties.
More complex planning involving investments, insurance bonds, endowments and trusts can also be undertaken.
However, even a comprehensive estate planning exercise could leave residual IHT liability.
A whole of life plan can be set up to meet this liability, leaving the full amount of the estate for the enjoyment of the beneficiaries.
Firstly, it will be necessary to find out the level of the IHT liability by carrying out a full review of the estate.
Relevant factors may include finding out about lifetime gifts that have been made, including potentially exempt transfers.
Gifts
The value of gifts will be added to the estate for the purpose of the IHT calculation if death occurs within seven years, or whether certain property will qualify for business property relief or agricultural property relief.
