When a person dies, the total value of his or her assets is brought into account in calculating inheritance tax and this includes the proceeds of any life policies.

However, it is possible to take the value of such policies outside the inheritance tax net by writing them ‘in trust’.

Consider Mr and Mrs Jones, a married couple. Mr Jones has a whole of life policy with a sum assured of £200,000. The policy is not written in trust and when Mr Jones dies the policy proceeds pass to Mrs Jones under the terms of his Will.

There will be no inheritance tax because transfers between spouses are always exempt. However when Mrs Jones dies the policy proceeds will be subject to inheritance tax of up to £80,000 (40% of £200,000).

The inheritance tax bill on the policy proceeds could be avoided if Mr Jones writes his life policy in trust. When Mr Jones dies, the policy proceeds will then be paid to nominated ‘trustees’ (who will probably be the persons named as executors in Mr Jones' Will).

The trustees will be authorised to divide the policy proceeds between a group of persons selected by Mr Jones and named in the trust document (the ‘beneficiaries’). Mr Jones could write a letter addressed to the trustees setting out his wishes for distribution of the fund.

The letter would typically state that Mrs Jones is to have access to the fund during her lifetime and then, after her death, the remainder is to pass to the children. When Mrs Jones dies the policy fund will escape inheritance tax because Mrs Jones does not own it. The fund belongs to the trust.

Writing a life policy in trust does more than save inheritance tax. The trust means that the policy proceeds can be immediately claimed following the policyholder's death. If a policy is not in trust then the proceeds cannot be released until a ‘Grant of Probate’ is obtained and this can sometimes take several months.

A life policy can be written in trust at the outset or it can be written in trust after the policy has been taken out. Many life companies issue forms to enable life policies to be written in trust. Alternatively, if you have a number of policies, a solicitor can draw up one trust deed which will cover them all.

You can contact Richard Mead on 01635 521212 or by e-mail richard.mead@clmlaw.co.uk