Revocable Nominations, Trusts and Inheritance Tax
In the absence of a nomination, or being informed of the existence of a will, Singapore Life Insurance companies may pay $150,000 of life insurance proceeds to any ‘proper claimant’ (any spouse, child, brother, sister, nephew or niece) and the remainder to whoever the eventual estate executor or administrator directs. It follows that it is wise to place a nomination for to reasons; firstly to ensure that 100% of the proceeds are either paid to who you wish or distributed by a person of your own selections and secondly to ensure that proceeds can be paid prior to the potentially slow probate process.
Under Singapore law, owners of life insurance policies can make nominations of beneficiaries in relation to their life insurance in two ways:
In making a revocable nomination, the policyholder retains all rights over the policy and can change the nomination at any time. This can be thought of as not a change of policy ownership, but merely a notification to the insurer that you wish proceeds to be paid promptly to a certain person or people. The insurer may then do so under Singapore law without waiting for probate.
If a nominee passes away, his or her entitlement passes to other nominees. If none remain, the nomination is treated as revoked
Trust Nomination (Singapore Trust)
In establishing a trust, the life policy owner transfer legal ownership of the policy to the trust and trustees, giving up all right to the policy themselves.
A Singapore Trust can only be amended or revoked with the permission of all nominees, or with permission on a trustee that is not the original policy owner. Consequently, if your priority is to maintain the ability to change who would benefit in the even of your death is a priority then the trust option should be avoided.
If a nominee of the trust passes away, the right under the trust passes to his or her beneficiary.
Crucially, the Singapore trust is not effective for the purposes of avoiding UK Inheritance tax in relation to life insurance payout. This is because the trust is revocable in nature. For those who are likely to be subject to UK Inheritance Tax on their worldwide estate (UK Domiciled people), an irrevocable trust is needed.
UK Inheritance Tax and Insurance
If someone who is UK Domiciled passes away owning a life policy on their own life (or if owned by a trust which is revocable in nature), the payout on death can be made to their estate, and the insurance payout will likely be taxed at a rate of 40% by HRMC. Clearly nobody takes out life insurance with the intention of enriching HMRC in this way, so it is essential that one of two options are taken to avoid this all too frequent occurrence.
Option 1 – Discretionary Gift Trust
Placing a life policy in such a trust, which is available for free from some insurers, amounts to a complete and irrevocable transfer of policy ownership to the trustees. As such, when the policyholder dies the payout cannot be attributed to his estate, and so UK Inheritance Tax is not due. This can clearly save a significant amount in tax.
This irrevocable trust appoints a trustee who can make payment of the proceeds to one of a wide range of ‘potential beneficiaries’. These include any spouse, child or grandchild of the settlor. As the trustee has complete discretion to pay to whoever he wishes, provided they are within that list of potential beneficiaries, you should clearly only appoint trustees who you trust completely. The settlor can of course provide guidance to the trustees as to who he wishes to receive the eventual payout.
The settlor is typically automatically one of the trustees, but it is hugely preferable to name at least one additional trustee (as clearly the settlor will not be there to perform trustee duties if the policy pays out).
If the last surviving trustee passes away, that person’s executor (as appointed within their will) will need to appoint a new trustee to the trust.
If the preferred beneficiary dies, the trustee must simply pay to one of the other potential beneficiaries.
Option 2 – Spouse Owns the policy
If your spouse owns the life insurance policy on your life, when you pass away the proceeds are not paid into your estate (they are paid to your spouse as policyholder), and so there can be no IHT payable by your estate in relation to the payout.
The main risk of this approach is that both you and your spouse pass away by common accident, in which case the payout could of course be liable to IHT as part of their estate. If the spouse is not UK domiciled, there is no such risk and so this approach would likely be the advisable way to go.
Some may also be concerned about what happens to the policy in case of divorce. In that situation, it would be fairly easy to assign the policy to the insured rather than leave an ex-spouse to benefit from your death.
Questions relating to domicile and Inheritance Tax can be complex, so we would strongly recommend that you get in touch with Chartwell Associates to discuss the appropriate structure for your life insurance.
Contact us here for a free consultation